Ukraine and the geopolitics of energy

8th April 2022 By: Saliem Fakir

It takes two mirrors for the correct image of one’s self” (Diary of Patricia Highsmith, 1968). By now we are all aware of Russia’s invasion of Ukraine and what has happened to our world. Several commentators have proposed that the reason for the invasion was the rapid decline in international liberalism – Edward Luce and John Mearsheimer have written a great deal on this.

After the Berlin Wall collapsed, there was relief and euphoria that the world had entered a new phase in history. Francis Fukuyama, like Karl Marx, was a student of Georg Hegel and argued that history was an evolution from one spirit of ideas to the other. For Fukuyama, liberalism had triumphed over totalitarianism. Fukuyama saw the spread of democracy finally gain a hold.

In some places, democracy was adopted organically and in others popular uprisings were supported or encouraged, if not orchestrated, and in yet other places countries were bombed to hell in the name of a liberal order and the eternal value of democracy.

For countries like Russia and China – communists and sworn enemies of the West – containment and cooption were the best option, and so began the Faustian bargain of wooing the two countries into the Western sphere through trade and investment strategies. China became the world’s cheap factory and Russia Europe’s cheap source of oil and gas. If you could not change authoritarianism through political democracy, you had to try doing so through trade.

Germany led the demand for energy by encouraging the building of gas pipelines and France cornered elements of the Russian gas value chain. These entanglements, as it was thought, based on the geoeconomics theory of Edward Luttwak, assumed that economic ties would disincentivise wars. Luttwak also proposed that democracies do not go to war and that thesis may hold somewhat.

Ukraine’s big problem has always been its geography. Ukraine, always finding itself as a buffer country between the West and the East, has struggled to shape its own destiny when major powers get involved in its internal affairs. Ukraine’s moving closer to the North Atlantic Treaty Organisation was always going to be a red flag for Russia, whose attitude has always been to throw every convention and rule book out the window to force Ukraine to do otherwise.

The Russian invasion is a reality and so is Europe’s attempt to become less dependent on Russian oil and gas. The demand for gas has grown since the major users of gas, such as Germany, took the decision several years ago to shut down nuclear plants and phase out coal. The search for alternatives has also taken place in the context of the European Union seeking to become less dependent on fossil fuels, given the bloc’s Green Deal package, the target of which is to cut emissions by 55% by 2030, compared with 1990 levels.

Transitions to alternatives are still tiny, compared with the world’s dependence on fossil fuels. For now, in what Antonio Gramsci would call the interregnum – where the old is dying and the new is still being born – there is not enough capacity to respond to the crisis that Russia has imposed on Europe and the world at large.

Ramping up capacity in order to displace Russian gas is unrealistic in the short term. Energy security will trump climate issues but in the long run they may well lead to sustained investment in alternative technology solutions.

In the meantime, Brunsbüttel, an old liquefied natural gas (LNG) terminal just outside Hamburg, which is being revived as the Nord Stream II gas pipeline project from the Russian coast near St Petersburg to Lubmin, in Germany, looks like it is going to be dead in the water. Of the 40-million homes in Germany, over 50% depend on gas for heating – so, gas is still big in Germany.

Despite all all its climate talk, the US is now seeking European money to build out more LNG export terminals, possibly bringing new capacity up to 187-million tons a year.

Even the surge in renewables will have other dependencies – the vast majority of the world’s solar panel production happens in China.

The rate of investment in alternatives such as renewables and hydrogen to fill supply gaps in Europe is a function of five things: land, capital, technology, critical minerals and breaking political and technical barriers to exports.

One must also consider all those things we use but do not realise are derived from fossil fuels; things like plastics, fertilisers, oils, paints, and hundreds of other things – even the tar on the road which we may drive on will have to be displaced with alternative raw materials. Fossil fuels, particularly oil and gas, are entangled in our daily life and we will require substitutes.

Currently, increased use of alternative supplies of fossil fuels and the surge in alternatives will be inflationary; the demand is much greater than the supply.

Both the Covid-19 crisis and the current war are forcing a rethink on globalising value chains or relocalisation of some of the critical global supply chains; some relate to semiconductors and future green technologies as well.

The US Congress recently approved a budget of $1-billion for climate efforts, compared with $14-billion for the war in Ukraine. This tells us that money can be found anytime there is a crisis, depending on which crisis you prioritise.

Africa may well see an oil and gas bonanza in the short run as Europe seeks security above climate interests at present.

Demand for oil and gas will surge and production capacity will be ramped up and there will be renewed interest in old projects, some of which have probably been put on hold. But, in the long run, African oil and gas economies will have to be careful that they do not sink too deeply into more oil and gas. Very few extractive economies are treated with mercy after all the extraction is done. Nobody cares about their people and their future; only the resource and money count, and there are friends aplenty while they want what you have.