5 December was a decisive day for the international energy market and saw three events that emanated from the global energy bottleneck starting with the Russian invasion of Ukraine in late February. The events on this day will shape the future of global energy supplies and, by extension, the world economy.
The first event was the application of the G7 group of countries price cap on Russian seaborne oil exports. The second was the application of the EU’s price cap on Russian seaborne oil exports. The third was the OPEC+ decision to “hold steady” on oil-production policies.
Energy lies at the intersection of military strategy on the one hand and economic and business and corporate considerations on the other. Economies cannot operate without energy. Tanks and fighter jets cannot move without fuel. The oil business is one of the largest businesses on the global level. Great powers establish their hegemony and their spheres of influence based on their control of secure energy supplies for themselves and, if possible, for others.
Wars, instability, and uncertainty in energy producing regions, such as Russia or the Middle East, have repercussions on the supplies, or expected supplies, of energy to other regions around the world. An increase in energy prices increases the cost of doing business around the world, and such rising costs are carried back to consumers. This, in turn, feeds into the political and economic decisions taken by governments.
Thus, there are many sources of uncertainty in the current global energy market. The first is the Russian invasion of Ukraine. The second is the OPEC+ decision to cut production. The third is the economic and political events in China that will affect global demand. The fourth is the reaction of the US to these developments as the world’s main superpower, in addition to being a major exporter of oil and natural gas in its own right.
Finally, there are the threats and opportunities facing Egypt amid these uncertainties.
UKRAINE WAR: The global economy has taken hit after hit over the past two years. The Covid-19 lockdown in 2020 caused a global economic recession that was followed by the sudden increase in global demand after the removal of the lockdown, causing the supply chain crisis in 2021.
In February 2022, the Russian invasion of Ukraine triggered a series of events and, arguably, a new energy crisis amid a global trend towards the energy transition.
The Europeans imposed several economic sanctions packages against Russia as a punishment. However, they were hesitant to impose sanctions on Russian oil and gas exports due to Europe’s dependence on Russian oil and, more importantly, natural gas.
What is perhaps new about this energy crisis is that arguably it was Europe that allowed itself to be trapped into such dependence on Russia. This is because the EU has increased its dependence on natural gas as a greener alternative to oil in the European energy mix over the past decade.
The share of EU demand for gas met by Russia rose from about 25 per cent in 2010 to about 40 per cent in 2021. In 2020, the EU energy mix stood at oil at 34 per cent, gas at 24 per cent, renewables at 17 per cent, nuclear at 13 per cent, and coal at 12 per cent.
In 2021, 40 per cent of the EU’s natural gas imports came from Russia, 25 per cent from Norway, eight per cent from Algeria, seven per cent from the US, 6.5 per cent from the UK, and the rest from other sources.
Germany, the EU’s largest economy, is particularly vulnerable. There are three gas pipelines delivering Russian gas to Germany: the Nord Stream 1 and Nord Stream 2 through the North Sea, plus the Yamal pipeline through Bulgaria, and finally a pipeline through Ukraine. It would be hard for Germany to import gas from North Africa or Azerbaijan, since the gas from these countries is linked by pipeline to Italy and there are no pipelines liking Italy to Germany, and it would take years to build new ones.
Moreover, the amount of gas from these regions would not be enough. Importing liquefied natural gas (LNG) would be difficult, too, since Germany does not have LNG regasification facilities, unlike the UK, Spain, and Portugal. In general, Europe does not have enough regasification facilities to import LNG, and it does not have enough storage facilities to store the gas.
Because of this dependence on Russian natural gas and the lack of sufficient alternatives, the Europeans are hesitant to put any serious sanctions on it.
In summer 2022, Russia suspended gas exports to Europe through the Nord Stream 1 pipeline due to maintenance work, and in September 2022, it suspended gas exports to Europe altogether. A few days later, unexplained natural gas leakages from the pipeline began on the seabed. So far, it is not clear who was behind them, but Russia has accused the British Navy of sabotaging the Nord Stream pipeline.
One uncertainty is how Europe will deal with the winter season without Russian natural gas. Perhaps this winter has been resolved. According to the International Energy Agency (IEA), EU gas storage has reached more than 90 per cent of its full capacity, so Europe is relatively covered for winter 2022. But most of this stored gas was imported from Russia despite the drop in Russian gas flows, and this might not be available for winter 2023.
As a result, the bigger uncertainty is how Europe will deal with the winters of 2023, 2024, and beyond without Russian natural gas. Germany has started to use coal to produce energy, though this will harm the environment and delay sustainability goals. The crisis has reemphasised for Europe the importance of diversifying energy away from fossil fuels such as petroleum and natural gas and towards renewable energy sources such as wind and solar.
Europe has indeed taken steps to accelerate the funding and activation of its renewable energy infrastructure because of the crisis. But how fast will this be, and whether it will be able to satisfy Europe’s energy needs in time, is another uncertainty.
The effect of the price caps imposed by the West on Russian seaborne petroleum exports is also not known. Over the past few months, the Europeans have been negotiating a price cap on Russian oil shipped by tankers by sea. There were initial disagreements between the Europeans over the price cap that would be imposed, with Ukraine calling for $30 a barrel and others calling for $65 or $70.
In September, the G7 group of countries agreed to impose a price cap of $60 a barrel on Russian oil. The mechanism is that tankers carrying Russian oil will not be allowed to receive important services, such as insurance, from the G7 countries if oil is sold at more than $60 a barrel. In November, the EU agreed on a $60 a barrel price cap on Russian seaborne petroleum exports.
According to global energy expert Anas Alhajji, the reason the Europeans agreed to $60 a barrel was because under the Russian tax system Russian oil companies cannot make a profit beneath $55 a barrel. So, if a price cap of less than $60 a barrel is enforced, this will lead to a reduction in Russian oil production and an increase in global oil prices, which the Biden administration in the US does not want.
The ban on insurance services from G7 countries will also only last for 90 days, not permanently, in order to avoid a sharp decline in supplies and a sharp rise in oil prices. Furthermore, these price caps will only be symbolic because Russia is already selling its petroleum at a discount to certain countries around the $60 a barrel mark.
Another uncertainty is how the price caps on Russian sea-exported oil will affect the position of Russian President Vladimir Putin. In an attempt to avoid the caps, he has established a so-called “shadow fleet” of about 100 oil tankers (mainly old and second-hand) that can turn off their GPS tracking and signalling devices to avoid detection as they carry Russian oil to export destinations. (Putin learned this manoeuvre from countries under western oil sanctions such as Iran and Venezuela). But the amount carried by this “shadow fleet” will still not compensate for the oil sales lost due to the price cap.
Putin is also trying to diversity Russia’s export markets away from Europe towards Asia. After the Europeans imposed different kinds of economic sanctions on Russia, an unprecedented amount of Russian oil was shipped to India, China, and other countries. Russia is now selling the oil to these countries at a discount of 30 per cent, and this is a big incentive for them to switch to Russian oil.
However, China and India will not fully compensate Russia for the loss of the European market. Russia still needs this, as Europe still imports more than half of Russia’s energy exports, even after the war. China is already buying all the oil it can from Russia, and India’s purchases of Russian oil are only 10 per cent of the EU’s.
A further uncertainty caused by the price caps is the reaction of the global markets. At the time of writing, oil prices were actually declining due to expectations of increased demand in China with the easing of the country’s zero-Covid measures and the rise in the dollar as indicators show the strengthening of the US economy.
These uncertainties are affecting a European energy crisis that, according to experts, is just getting started and has not yet reached its peak
‘WORST POSSIBLE MOMENT’: On 5 October, the OPEC+ countries, a group which includes the members of OPEC in addition to other oil-exporting states including Russia, took a decision to start an oil-reduction policy in November.
The amount of the reduction was surprisingly big: a reduction of two million barrels of oil per day (mbpd) compared to August 2022 levels starting in November 2022 and lasting until the end of 2023. This reduction is the largest for two and a half years and the start of the Covid-19 lockdown.
However, the real reduction was only about one or 1.1 mbpd. This was because OPEC+ was already producing below its target oil production, as many OPEC+ states lack investment or suffer from economic problems that affect their production. Therefore, the OPEC+ states see the supply reduction policy as a corrective mechanism.
Furthermore, the increase in interest rates in the US by the central bank the Federal Reserve in the spring and summer of 2022 and China’s zero-Covid policy have led to forecasts of a decline in the demand for oil, leading speculators in the international market to provoke a decline in oil prices by 30 per cent in the period from June to October 2022.
As a result, OPEC+ had to take this step in order to balance the price of oil. It could be further argued that the increase in the price of oil between January and September 2022 was far less than the increase in price of other energy sources. Between January and September 2022, the price of Brent crude oil increased by only six per cent and the price of West Texas Intermediate by only one per cent. During the same period, fuel prices in the US increased by 11 per cent, the price of natural gas in Europe increased by 69 per cent, and its price in the US went up by 84 per cent.
The price of liquefied natural gas in Asia increased by 66 per cent, and in France it increased by 77 per cent. The price of coal increased by 33 per cent in China, by 110 per cent in Europe, and by 125 per cent in the US. All of these indicators and market volatilities led OPEC+ to see their decisions as a self-defence mechanism.
Nevertheless, the Biden administration expressed its anger at the OPEC+ decision. Despite the Arab members of OPEC stressing that the decision was purely economic, with no political intentions, US President Joe Biden accused Riyadh of siding with Moscow through the decision to cut production, since this would lead to a decline in global supply and an increase in the global price, both of which would aid Moscow in the face of western sanctions.
Barbara Leaf, US assistant secretary of state for Near Eastern affairs, said the OPEC+ decision had come at the “worst possible moment” and would have repercussions on the global economy. Biden also vowed that “there will be consequences” to the Saudi-led decision to cut the OPEC+ oil production.
On 5 December, OPEC+ had a short online meeting where it was decided to keep oil production “steady” at current levels. There were expectations of a further cut, so the fact that the group kept production levels steady was seen as a positive sign by the market. The reason why OPEC+ did not want to make any changes in its oil-production policies was that it was aware of the uncertainties in the market, including the price cap on Russian seaborne oil exports and the situation in China.
As a result, it wanted to see the effects of these events before making any changes to current production levels.
OPPORTUNITIES FOR EGYPT: Amid these uncertainties in the global energy market, Egypt is trying to find opportunities. As was mentioned in a previous article in Al-Ahram Weekly, Egypt, Israel, and the EU signed a memorandum of understanding (MoU) on 15 June to export Israeli natural gas to the EU after liquefying it in Egypt.
The agreement was signed by EU Commissioner Kadri Simson, Israeli Energy Minister Karine Elharrar, and Egyptian Minister of Energy and Petroleum Tarek Al-Molla. Elharrar said that the agreement showed Egypt and Israel’s “commitment to share our natural gas with Europe and to help with the energy crisis.” Al-Molla said that it was “official recognition from Europe that Egypt is a regional hub for gas trading and a global hub in the field of energy” and that “the European Union considers us as among their primary suppliers.”
Since it was an MoU, however, no details were mentioned about the exact amount of gas to be exported to the EU or about a timetable on when these would start. Furthermore, Israel will need several years before it can increase its gas supplies to Europe. “In the short term, there will be some increase, but the big numbers will come later,” Lior Schillat, director-general of the Israeli Ministry of Energy, told Reuters.
Egypt is not isolated from the uncertainties in the global energy market, and Egyptian policymakers and consumers will have to tread carefully to balance Egypt’s energy needs and its ambitions to become a regional energy hub.
The writer is a political science lecturer at the British University in Egypt and a member of the Egyptian Council for Foreign Affairs and the UK Royal Institute of International Affairs.
*A version of this article appears in print in the 22 December, 2022 edition of Al-Ahram Weekly