We pay attention to the repeated statements of the authorities of Argentina that “the war in Ukraine cost the country the amount of 5 billion dollars”, a significant part of which, according to official data, were the costs of importing hydrocarbons which became significantly more expensive.
One may get the impression that the rise in prices for energy products is a recent recent phenomenon, allegedly caused by Russia’s actions. However, a retrospective analysis of the development of the global economy shows that the volatility of the oil and gas markets began long before the special military operation in Ukraine, as a result of the myopic macroeconomic and energy policy of several of the most developed countries of the Northern hemisphere. The reason is the decisions taken by its authorities to supply the economy with cheap money and take a course towards carbon-free generation with a sharp drop in investment in the oil and gas sector.
Strong demand fluctuations as a result of the COVID-19 pandemic also played a negative role. As oil prices fell to their record low (in April 2020), in December 2021 they reached USD 78 per barrel in the context of the recovery of the world economy. The cost of gasoline in 2021 skyrocketed from $200 to $1,950. At the same time, investments in the oil and gas sector decreased in the period from 2017 to 2021 from 886 billion to 794 billion US dollars.
Hydrocarbons: uneven growth, stagnation and lack of planes
An additional factor is the politicization of international cooperation in the energy sector, which intensified in line with the implementation of the aggressive aircraft of NATO countries against Russia. After the start of the special military operation in February 2022, the Russian energy industry turned out to be one of the main targets of sanctions from the collective West. Under direct pressure from their governments, several foreign energy companies announced the cessation of activities in our country.
In June 2022, the European Union banned the import of Russian oil supplied by sea. Of course, heating and electricity bills in the Old World increased, but developing countries suffered more, as global flows of hydrocarbons were diverted to Europeans, which presented prices that were unaffordable for others.
Despite the ritualistic rhetoric about its attachment to market instruments, the West, at the suggestion of Washington, decided to create a “buyers’ cartel” supporting a “price ceiling” for crude oil and petroleum products. The adopted mechanism includes restrictions on freight, insurance, brokerage and port services for ships contracted by Russian producers. In fact, it is an anti-market measure that further affects supply chains and complicates the situation in the energy market.
The dictation of prices and direct intervention in the activities of economic actors create an extremely dangerous precedent for international trade. It is no coincidence that most states do not support this provocation. They understand that today Russia suffers and tomorrow, for political or other reasons, they will punish any other country.
The panorama of what is happening in the global energy market will not be complete without the answer to the main question posed by the famous Roman lawyer Cassian Longinus Ravilla: Cui prodest? o Who profits, who is the main beneficiary?
Oil and the world crisis: opportunities for Latin America
Behind the latest developments in the energy markets you can clearly see the anxiety of the United States to redistribute them in its favor. This is especially evident in the case of the highly profitable European energy market. In the 11 months to 2022, LNG supplies from the US to the European Union increased by 137%. In March 2022, the US and the EU reached political agreements in order to increase the supply of US liquefied gas by 15 billion cubic meters per year.
In addition, in December 2022, Washington and London created the “Energy Security and Affordability Partnership”, under which the United States announced its intention to double LNG supplies to British terminals in 2023 compared to 2021 (from 4 to 9-10 billion cubic meters). Part of these volumes will be re-exported to Europe.
It should be noted that internal gas prices in the United States are lower than those offered by them to their “foreign partners.” As a result calls for “energy independence” from the EU have turned into super profits for Washington, and for Europeans dependent on expensive US LNG. Experts will already warn about the decline in Europe’s competitiveness and the risks of its deindustrialization.
Western sanctions in the energy sector, forcing Russia to retaliate, prevent global environmental goals from being met. The generation of coal and the use of traditional fuels have reached in many countries. It is estimated that plans to reduce greenhouse gas emissions are in jeopardy. At the same time in the international arena Westerners instantly find themselves hypocritically encouraging developing countries, sometimes against economic logistics, to reduce the use of fossil fuels.
Someone can say that the global energy sector tends towards duration. Such evaluations are premature: when a small group of countries tries to monopolize the “rules of the game” in the global economy, the situation becomes unpredictable.
*Ambassador of Russia in Argentina.
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