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APR. 22, 2022

Running low on gas (and oil)

The most visible effect of the Russia-Ukraine war on people's everyday lives is the increase in energy prices. Even those who are not interested in international geopolitics and the economy, by now have noticed that the price paid at the gas station and the utility bills are higher than a few months ago.

Russia is the gas station of the world as it exports large quantities of crude oil, refined fuels, and gas. However, because of the recent sanctions, Russia is supplying less energy than ever to the rest of the world. Russian oil production has been 300.000 barrels per day below the production target in March, and the combined flow of natural gas through the three main European pipelines is half what it was in April 2019. Russia is trying to divert its energy exports toward other countries, India and China being the largest importers.

The insecurity and the disruptions in the energy supply chain increased the oil and gas prices to the benefit of Russia, which expects to earn an additional 9.6 Billion USD from energy exports in April. It may look like the war is paying for itself, but the reality is that many Russian tankers are at sea waiting for orders.

On the other hand, Europe is hit particularly hard by the energy shortages for three reasons: its activism in imposing sanctions against Russia, its lack of local energy sources, and the retaliation of Russia, which put the EU on the unfriendly countries list. European countries are rushing to adopt countermeasures, such as signing energy deals with African countries to curb the dependency on Russia. The United States, much less dependent on Russia for their energy needs, are also offering a helping hand through LNG exports and the use of strategic oil reserves to moderate prices. Another source of relief could be coming from the OPEC countries; however, these states have already announced that they will not be increasing production due to their growing strategic cooperation with Russia and the limited spare capacity.

For a possible development, we can look at one historical precedent: During the American civil war, the Confederate States of America cut the cotton export to France and England to force their support. However, the Confederate plan did not have the intended effect: the European countries continued not to support the Confederacy and sourced the cotton from the East Indies. Today, Europe does not support Russia but needs to find the new "East Indies" for energy sources.

We thank you for your continued support.

The FAM team