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Lessons on Oil Dependency

The ongoing crisis in Ukraine has provoked a lot of heartache, kindness, and solidarity worldwide. It is clear that this is a pivotal moment in European and global politics. The impact of the Russian invasion goes beyond the humanitarian disaster and into the realm of global trade – particularly, the events have generated a lot of attention on energy security. European and global energy dependence on Russia greatly hinders international aid for Ukraine. There is a complex geopolitical lens to sanctioning Russia and support of Ukraine that is directly tied to oil dependency. This is a subtle but serious security issue, and it is not unique to recent events. To understand the threat of oil dependency more comprehensively, we have broken it down into 3 perspectives: environmental, economic, and geopolitical. 

The Environment

The 2021 IPCC Report states that even if carbon emission targets are met, it will still take 20-30 years for global temperatures to stabilize. Human activity can be linked to the increase in every measure of climate change – limiting carbon emissions is central to many of the environmental, ecological and humanitarian crises unfolding across the globe. The production and use of energy account for more than 75% of greenhouse gas emissions worldwide. It is imperative that the global market transitions away from oil, coal and gas to renewables. Moreover, climate change is causing harsher seasons: dryer summers, harsher winters. The near-future impacts of the Ukraine-Russia invasion will leave those tied by oil trade at particular risk of an energy shock come next winter. Energy demand will be at its highest. The winter will be expected to increase in its severity, so not only does mining and using oil degrade the environment, but it accelerates climate change to increase our need to use energy. This is a vicious cycle and a stark reality for people across the globe.  

“The evidence is irrefutable: greenhouse gas emissions are choking our planet and placing billions of people in danger. Global heating is affecting every region on Earth, with many of the change becoming irreversible.”  

Secretary-General of the UN, António Guterres (IPCC, 2021).

The Economy 

A dependency on oil is not only detrimental to the environment but has serious implications for the economies of those who import and export.  For Saudi Arabia and Russia, the largest oil exporters of the world, oil trade accounts for 70% and 60% of their exports, respectively. Such a high dependency on one source of trade creates a very fragile economy. From 2010 to 2018, Russia had become even more dependent on hydrocarbons, which was evident by the 2020 COVID-19 pandemic. Even before the world came to a standstill in the spring of 2020, the epidemic in China had huge impacts on the global oil market. In the first 6 weeks of 2020, Russian exports to China dropped by a third due to one of the world’s largest economies shutting down.

Now consider those nations who reap significant profits from investing in oil, particularly from countries that are not conducting themselves according to national or international law. ESG funds and those who invest in them face considerable criticism following Putin’s invasion of Ukraine. How can a fund adhere to ESG guidelines while investing in a country waging an invasion? ESG funds had at least $8.3billion invested in Russia before the invasion of Ukraine – the value is unknown because the Moscow Exchange has remained shut down since February 25. International sanctions have made Russian trade virtually impossible. Kiran Aziz, head of responsible investment at KLP, Norway’s largest pension fund, summarizes, “the lesson for ESG investors is to act before war breaks out and not be afraid to denounce and divest from companies and countries that are serial human-rights violators.”

Countries with investments in Russia now face direct financial losses as a result of sanctions and divestment, but also the knock-on effect of less oil being available to run their economies. For example, in 2021, the U.S. was the largest consumer of oil globally, at 19.78 million barrels per day. Even if the U.S. produced all petroleum products ‘in-house’ without the need for imports, the average American would still feel the impact of market volatility just because of the country’s dependency on oil. This is a serious threat to national security but one that is often overlooked in the face of other security issues such as nuclear warfare and terrorism. The American Security Project (2013) summarizes the impact of oil dependency on U.S. society in 3 ways: 

  1. Oil volatility hampers productivity and consumers, thus impacting the local and national economies. 
  1. U.S. oil dependency distorts foreign policy (see geopolitical perspective). 
  1. U.S. oil dependency undermines military preparedness and effectiveness as the military protects pipelines and operates using oil-based machinery. 

The Geopolitical Sphere 

In the face of war, weighing up the profitability versus the risk of loss in defending those in need can seem incomprehensible; however, it is a very real part of decision-making. Despite unanimous global agreement that the actions of Russia towards Ukraine are unlawful and an act of war, Russia’s domination of global energy trade remains a crucial setback for allies of Ukraine. While not exclusive to the current Ukraine-Russia conflict, it is evident that global leaders are held back in enacting measures against Russia due to the oil dependency of their economies. This is especially true for Europe, as Russia is the leading source of the region’s energy needs representing 27% of crude oil, 42% of natural gas and 47% of coal imports. Therefore, oil dependency creates a serious problem for oil-dependent nations and significantly impacts the energy security of an entire continent.

This is not the first time that nations have faced an issue of choosing between their economies and humanitarian solidarity – and it’s also not the first time that Ukraine and Russia have been in this position. In 2014, the U.S. placed economic sanctions on Russia in response to Russia’s annexation of Crimea from Ukraine. The sanctions were similar to the most recent ones where Russian firms had limited access to U.S. capital markets and prohibited the export of goods. While time after time, the world finds itself in a position of global inter-dependence and compromise, the effective transition away from oil dependency remains to be seen. 

What to do about it? 

Some countries like the U.K. are tackling oil dependency and stifling Russia’s advances by banning Russian oil imports by the end of 2022. Banning import operates as a tool of economic pressure similar to sanctions (see our previous post on sanctions). Despite earlier reservations, Germany and the U.S. appear to limit pipelines such as Nord Stream 2. Even global companies like BP, Shell and Equinor are divesting their Russian assets. Realizing the risks of over-dependence on oil in general and specifically over-dependence on a singular country for energy supply creates opportunity. 

  1. Reduce demand. Individuals, communities and nations need to make low-carbon choices and divest from the fossil fuel industry. The transition to clean energy and sustainable lifestyles is paramount for addressing oil dependency. 
  1. Diversify supply. Remove the power from oil monopolies like Russia to create a more evenly distributed oil supply and allow for the transition of oil-dependent economies. Remove barriers to humanitarian and political aid in conflict situations by diluting the role a single country has on another’s economy. 
  1. Invest in renewable energy. We must move away from fossil fuels, oil and finite resources altogether. This is an environmental, economic and geopolitical imperative. Renewables require investment to increase supply and make it a more accessible and affordable choice. 
  1. Improve energy efficiency. Alongside increased investments, the utilization of technology to improve energy efficiency must follow. At every stage of production, transportation and use, energy is wasted. In the transition to renewables, we must improve efficiency and avoid waste. 

FLIT Invest stands in solidarity with Ukraine and those affected by the ongoing conflict. 

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