Russia’s oil weapon more potent than gas blackmail

Russian military action in Ukraine could trigger an energy crisis even more serious than the one already hitting Europe. As has been pointed out, should the West hit Russia with severe new sanctions, President Vladimir Putin could cut off natural gas exports, leaving the continent shivering through midwinter. Yet there is another potential weapon of Russia’s that’s been less discussed and might be very effective: An ability to disrupt global oil markets, which would directly hit US consumers.
There’s no doubt that Russia’s influence over natural gas exports to Europe gives Putin reason to believe he might avoid harsh punishment should he invade Ukraine or undertake major efforts to destabilise the Kyiv government. Despite talk from US President Joe Biden’s administration about finding the Europeans supplies from elsewhere, there simply is not enough uncommitted natural gas in the global system that could be redirected to Europe at a reasonable price. Piped natural gas can only flow where existing
infrastructure takes it.
There are also constraints on liquified natural gas, which can be more easily redirected with container ships: As of 2020, 60% of this LNG trade was governed by medium- and long -term contracts. Even if Europe was successful in bringing existing spot-market LNG trade its way, it would mean paying extremely high prices in a bidding war with Asian and other customers.
That said, cutting the gas supply has some notable downsides for Putin. First, it would forever damage Russia’s relationship with the Europeans. They would no longer be able to argue, as they have to US officials wringing their hands about their dependence on Russian gas, that Gazprom PSJC, the state-owned behemoth, “has been a reliable supplier for decades.” Even after this particular crisis, there would be no returning to the status quo. As European Union climate chief Frans Timmermans told EU energy and environment ministers last week, “If we really want to stop long-term making Putin very rich, we have to invest in renewables and we need to do it quickly.”
In addition, Europe’s consumption of Russian gas is central to Putin’s own economy. In 2021, Russian natural gas made up nearly 13% of all of Russia’s exports, depositing almost $62 billion in the Kremlin’s coffers. And while Russia has been looking to shift natural gas to other markets, the overwhelming majority of it
is transported through pipelines that flow east to west, so redirecting it to thirstier markets like India or China would be very expensive and logistically a near-impossibility in the short and medium term.
Moreover, while Russia’s actions would potentially cause a major spike in natural gas prices, Russian coffers wouldn’t greatly benefit. The inability to redirect most of the gas to other markets means that Russia could only expect to make up through higher prices a modest portion of the revenue lost because of lower sales. Paradoxically, a cutoff of Russian natural gas to Europe could benefit US LNG exporters, by providing new access to consumers on the continent.
Given these potential pitfalls, Russia may find oil markets a more sensible place to retaliate. The global market for oil is extremely tight right now, made apparent by rising oil prices even in the face of an economy feeling the weight of the omicron variant. (Note that the International Monetary Fund has revised its forecast for global economic growth in 2022 downward by 0.5%). Russia could unilaterally drive up global prices if it cut its current oil production of 10 million barrels per day by even a relatively small amount.
An oil-price spike would directly affect the US — and a Biden administration understandably sensitive to gasoline prices.
Markets get jittery when spare capacity shrinks or disappears; although exact numbers are unknown,
the International Energy Agency and others believe that the world’s spare capacity is dwindling in face of limited investment. At a certain point, tapping into existing spare capacity could drive prices up as much as it brings them down.
Finally, depending on how much Moscow curtailed its oil production and the reaction of other producers, Russia might even find a move to curtail global oil supplies to be revenue-neutral. Given the inelasticity of demand for oil, a sudden sharp move reducing supply could drive prices up to a level at which Russia brings in more money from lower exports.
Of course, just as with cutting off natural gas to Europe, tampering with oil markets would not be without costs for Russia. As Dan Yergin, author of the Pulitzer Prize-winning “The Prize: The Epic Quest For Oil, Money & Power,” reminded me, “One needs to remember that Russia makes a lot more money from its oil exports than from gas.” A spike in oil prices would displease China, straining Beijing’s support for Russian efforts to rewrite the rules of the international order, beginning with the European
security architecture.
Russia might well disguise a retaliation-through-oil strategy, claiming an explosion on a pipeline or an environmental disaster. Russia has allegedly curtailed its oil exports under dubious
circumstances in the past.
Curtailing its natural gas flows to Europe remains Russia’s most obvious leverage in avoiding harsher sanctions. But Putin has no doubt considered his options as they relate to oil as well. Western policy-makers need to focus on reacting quickly to either contingency or both.

—Bloomberg

Meghan L. O’Sullivan is a Bloomberg Opinion columnist. She is a professor of international affairs at Harvard’s Kennedy School