ENERGY AS A WEAPON.

Ukraine was invaded by Russia on February 21, 2022.More than 100,000 people died, and millions were displaced. Large-scale migrations were experienced into countries like Germany (1 million), Poland (1.5 million), and the Czech Republic (0.4 million). Putin's war goes far beyond rockets and bombs. Possibly, it all started when the EU set forth the plan to shift from a fossil fuel economy to a renewable energy-based economy. Everyone, from a kid studying in the 5th grade to a senior citizen chilling on his couch, knows that the future is about renewable energies. Obviously, Putin knew about it. So, did he start the war to amalgamate the lost Russian land or to profit from high energy prices? Let's see. 

Energy prices in Europe have been soaring. Some parts are facing major power cuts as well. The war has had such a negative impact on the EU that once-net exporting countries like Germany are now running trade deficits. But all this sounds familiar. It seems like this has happened in the past. Oh, yes, it was the 1970s oil embargo.

1970 was an era when the Middle East was very unstable. The Arab-Israeli war of 1973 had sent an energy shock reverberating across the world. OPEC, the world's largest oil producer at the time, imposed a boycott on oil exports. As a result of this decision, energy prices increased by more than 300% in a single year.

Russia invaded Ukraine in 2022. Following this decision by Russia, the West imposed heavy sanctions on the supply of oil. On the contrary, Russia answered by cutting off gas supplies to Europe. Being heavily dependent on oil and gas from Russia, Putin single-handedly pushed Europe into a recession.

This isn't new. OPEC had cut off oil supplies to the West and other Western nations in 1973 to prevent them from supporting Israel in the Arab-Israeli War. Saudi Arabia had found new oil deposits in the 1970s, and the US, being a capitalist nation, wanted to profit from this. Hence, the then President of the US asked Saudi Arabia to carry out dollar-denominated oil trades, and in exchange, the US promised to protect them from other Middle Eastern nations. The embargo caused immediate economic pain across the world, but not the impact OPEC was looking for. The lessons learned from the shock are that oil sanctions don't work.

By the 1970s, 80% of America's oil supply came from the Middle East, creating an unhealthy dependency. Arab nations were using this war as a weapon to force America to make changes to its foreign policy. If not, the Middle East said that they would decrease the oil supply by 5% a month until Israel backed out.

For the west, it was devastating. The embargo happened when the western economy was already fragile. The US was facing serious inflation, and by serious, I mean 20%. The embargo pushed serious inflationary pressures into a major economic crisis.

Energy had become a weapon. The world economy was completely dependent on oil from the Middle East. It was a point of inflection. With their oil power, the Middle East was ready to conquer the world.Until 1950, the US was self-reliant for its oil needs. But, as the economy progressed and as they came out of the great recession of the 1930s, the oil demand went up, and then they had to look outside for more supply. The US was transitioning into a growing economy, which meant that their needs were increasing and, hence, the balance of power in the global markets was on the verge of shifting.

The US was facing a deficit of oil and oil products. Despite the embargo, US imports from OPEC fell by 50%. Over the next few years, the price of oil quadrupled. The impact of high oil prices was felt by the global economy. By the time 1974 came, the global economy was pretty much in a recession. One great energy economist, Morris Adelman, said that if the Arabs wouldn't supply, then someone else would.

He was right. Even though America paid more, the supply was coming in. The Arabs refused to sell oil to the US, but the supply to other nations was on. What the US did is that it started importing refined oil instead of crude oil from other nations. Just five months in, OPEC lifted the ban without the US changing its stance on Israel. The reason was that oil is a fungible global commodity. Every other barrel of oil is connected to every other barrel of oil, even though there is a minor difference in grade, refining, and quality. Basically, oil will roll somehow. 50 years after the war, the US is learning the same thing again.

Despite cutting energy supply from Russia, Europe is still getting oil, but only via India, where it is refined from crude and sold at a higher price. Today, Russia is actually making more money by selling oil than it ever did. When Russia invaded Ukraine in the first week, Europe imported $60 billion in oil and gas, and Nancy Pelosi talks about India funding the Russian invasion.

The world hasn't learned anything from the 1973 embargo. Europe committed the same mistakes that the US did. not diversifying their suppliers, having an over-reliance on a single supplier, not understanding the geopolitical game, etc. Germany's reliance on Russia for natural gas is 55%. The embargo changed the way the US viewed energy security. America began to increase domestic capacity and began the long journey towards oil self-sufficiency.Europe didn't follow suit. During 2021, more than a quarter of Europe's supply came from Russia. They squeezed Europe badly. Putin knew that the world couldn't stop consuming oil. He used this dependency to start the war, fund it, and take what he wanted.

In 2021, the EU imported 88% of its oil and gas demand, around 45% of which came from Russia. On the other hand, Russia retaliates by sucking out its gas supplies because of the sanctions. The supply shortages have sent prices skyrocketing around the globe. Natural gas touched a new high of 300 euros/MWH. There are some similarities between the 1970s embargo and the energy crisis Europe is going through today. Gasoline prices are high, oil supplies are tight, presidents, PMs, and central banks are trying to tame down inflation, and egos are high. However, today's energy markets differ from those of the 1970s due to our increased interconnectedness. A shock in one region can affect another nation as well. 

According to a report by Reuters, average electricity bills in Europe have risen by 177%. Europe has been trying to reduce its dependency on Russia, but only two countries have been successful in this attempt. The UK, which gets its gas supply from Norway, and Lithuania, which has been supplying Russian gas to America, But Russian gas is still finding its way into the European market. It's like trying to stop a long-lasting tradition. You can't stop it when you want to. One needs to develop alternatives, and the geopolitics are bad.

One of the tensions exposed by the energy crisis of 2022 is the hypocrisy of Europe, which basically gobbles up the world's LNG prices by paying heavy premiums to make sure it's on the market and well supplied. Western countries with big pockets are outbidding countries with small pockets for fuel, so the crisis is not coming to an end. Two of the most affected countries are Bangladesh and Pakistan.

This fiasco not only showed us the risk of being dependent on another nation for basic needs but has also forced governments all over the world to find renewable sources as alternatives.

 

HAPPY INVESTING.