Baker Institute Report: Russia-Ukraine Provides Policy Lessons on Oil, Natural Gas as Geopolitical Weapons

HOUSTON – (June 26, 2023) – The Russian invasion of Ukraine has brought renewed focus on the use of energy resources as geopolitical “weapons.” But the respective experiences for oil and natural gas in the past year — Russia’s two main energy exports and the leading energy sources for Europe and the U.S. — provide strategic lessons for policymakers, according to a new report from Rice University’s Baker Institute for Public Policy.

Russia tried to use its control of natural gas as a weapon due to the perceived dependence of Europe on Russian gas. At the same time, the EU, the U.S. and their allies have used oil sanctions in hopes of constraining Russia’s military actions. The perceived leverage has been related to the fact that oil and natural gas are accessed, traded, used and available in different ways. However as Mark Finley and Anna Mikulska argue that non-market and difficult to predict factors accounted for a significant gap between the perceived leverage of each and the reality.

“Russia clearly anticipated that it could use Europe’s dependence on its natural gas exports as leverage to weaken European resolve in responding to the Ukraine invasion,” they wrote. “This perception was based on natural gas being seen as a regional market with limited infrastructure in Europe for bringing in alternative gas supplies. A combination of sharp price increases, quick policy action, ability to pay very high prices and good luck with the weather has allowed Europe to manage the dramatic reduction of Russian natural gas availability — so far.”

Russia will continue to experience stress from the impacts of its cuts in natural gas trade to Europe, Finley and Mikulska explain. Due to a lack of infrastructure, no other consumer can immediately substitute for Europe, which means lower natural gas export revenues going forward and the prospect of shutting down production.

Unlike natural gas, oil is a global market, so Russia’s ability to use it as leverage without impacting countries like China and India was limited. The U.S., EU and their allies tried to use oil sanctions against Russia, but their own economic and political vulnerability to higher prices constrained the available policy options. 

“To limit the potential economic blowback, the Western allies sought to utilize a suite of policy tools that had been built up over 50 years to manage oil security risks,” Finley said. “Specifically, strategic stockpiles and spare production capacity – most notably in Saudi Arabia. But while an unprecedented release of strategic stockpiles (especially in the U.S.) helped ease oil market concerns, Saudi Arabia and other OPEC producers instead doubled down on production cuts in coordination with their OPEC+ ally, Russia.”

Future climate policies are likely to reduce European and U.S. dependence on oil and natural gas over time. But Finley and Mikulska argue that the critical importance of oil and natural gas in the energy mix for the foreseeable future means that the possibility of employing energy as leverage will remain a geopolitical reality.

“One clear lesson is that possibilities for leverage vary according to the conditions. Both Russia and its opponents learned this when they tried to employ oil and gas trade flows as weapons. Price signals, inventories and diversity of supply and suppliers as well as fuels all helped to alter perceived leverage,” the authors wrote. “Well-diversified trade in energy — and other critical products — paired with related infrastructure and government policy can help secure supply when unexpected factors complicate markets.

Publication: Mark Finley, et al., Wielding the Energy Weapon: Differences Between Oil and Natural Gas, Baker Institute (2023). DOI: 10.25613/G9P2-3F78
Original Story Source: Rice University