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. 

Leave a Comment

Your email address will not be published.

Latest from our Blog

Take Part in Building a Sustainable Future

Join the waitlist to secure your spot for early access and a chance to win $1,000!

Scroll To Top

Thank You For Your Interest!

Join the waitlist to secure your spot for early access and a chance to win $1,000!

Prior to founding FLIT Invest, Alejandro worked at J.P. Morgan’s Private Bank in New York, where he oversaw and managed investments for ultra-high net worth families. Before J.P. Morgan, he was an investment analyst at Northwestern Mutual, responsible for developing comprehensive financial plans and asset allocation models. Alejandro is a CFA charterholder and former professional soccer player.

Steven is a UX/UI Designer based in Los Angeles, CA. He received his BA from CSULB focusing on graphic design. Steven approaches his projects with a keen eye for design while prioritizing user-friendly solutions. He is passionate about animal welfare, and environmental causes.

Prior to FLIT, Kinga worked at Ericsson as a software developer specializing in data analysis where she developed machine learning models to evaluate the quality of the encrypted media traffic over mobile networks. She is an advocate for promoting a transparent and effective work environment. Kinga values diversity and feels strongly about providing access to education. She has a sweet tooth, loves reading and HIIT training.

This is the Title

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Aenean egestas lectus egestas augue turpis. Vitae adipiscing hac lorem aliquet odio leo, lacus, etiam. Amet praesent fermentum, vestibulum augue sed fames neque, molestie quis. Ullamcorper morbi enim nibh aliquet dolor maecenas. Eget semper sed etiam nibh purus gravida sit libero, ut. Dolor amet, ac accumsan interdum quis.

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Aenean egestas lectus egestas augue turpis. Vitae adipiscing hac lorem aliquet odio leo, lacus, etiam. Amet praesent fermentum, vestibulum augue sed fames neque, molestie quis. Ullamcorper morbi enim nibh aliquet dolor maecenas. Eget semper sed etiam nibh purus gravida sit libero, ut. Dolor amet, ac accumsan interdum quis.

Prior to founding FLIT Invest, Richard was an investment banker at ING in London. He advised banks, asset & wealth managers, FinTechs and other financial institutions on mergers & acquisitions, financing and other strategic projects. He is an impact investing enthusiast having advised BlueOrchard – leading global impact investing asset manager – on their sale to Schroders. Richard is a former professional triathlete, vegetarian and nature enthusiast.

Serena is a sales and growth professional. She has experience in rapidly scaling revenues for consumer products through the deployment of marketing campaigns and team strategy development. Serena has a keen eye for identifying and implementing emerging consumer trends that result in better user experiences. She is passionate about criminal justice reform and is a loud voice in the fight for gender and racial equality.

Martin is a Software Architect and Developer whose goal is to make FLIT Invest an application that puts usability and security first. Martin started his career in finance, where he developed an integrated treasury solution for banks and corporations. Then he deep-dived into medical imaging at Siemens Healthcare, where he spent years developing a next-generation radiography system. Martin is an avid traveler and loves cycling, hiking, and skiing.

Zsolt has worked as a Software Engineer in Germany, Scotland, and Hong Kong. His work experience lies predominantly in the FinTech industry, both in startups and well-established companies. Before FLIT Invest, Zsolt was a developer at Asia’s leading wealth management platform in Hong Kong. Alongside FLIT, Zsolt is completing his Master’s Degree in applied mathematics in London. In his free time, he enjoys swimming and reading fiction.

Tina is a UX/UI Designer based in Los Angeles, CA. Her expertise in both Economics and Interactive Design allows her to approach topics from a variety of perspectives in order to create products, assist people, and solve problems. She characterized challenges in a larger scope as an explorer, and she continued to look for solutions that would better human life. In addition to design, Tina is enthusiastic about women’s issues in society and animal welfare in various countries.

Peter is a Mobile Engineer with extensive experience in native iOS and Android app development. He has worked with various Fortune 500 companies across industries including fintech, transportation, human resources, energy, accounting, and pharmaceuticals. Being a lifelong learner he’s always eager to acquire new skills in various topics. He’s enthusiastic about different aspects of finance, and in his free time he enjoys working out.

Nick is a User Researcher based in Los Angeles, CA. After receiving his BA in Psychology, he moved on to receive a certificate in UX/UI from UCLA which set him on the path to understanding users. Nick approaches User Research with an empathetic lens, ensuring that every user’s needs are considered in each step of the process. Nick is passionate about providing sustainable change, and in his free time, he’s looking for another national park to check off the list.

Brian is a self-taught iOS developer based in Los Angeles, CA. Driven by a strong interest in finance and renewable energy, he takes pride in being part of a team that takes huge steps towards a greener future. Prior to joining FLIT, Brian played multiple competitive games such as League of Legends at a top-tier level- applying the same mindset of growth and improvement from gaming to his iOS development. Brian is often playing the piano in his free time and is extremely fascinated by artificial intelligence.

Rob is an impact investing analyst passionate about sustainability and its role in finance. Currently, he is a student at the University at Buffalo (UB), where he is the President of the UB Sustainable Business Association and a Board Member of the UB Equity Research Group. In his free time, you can catch Rob exercising or golfing.

Holly is a BSc Psychology with International Placement graduate from the University of Manchester, UK. She has worked and volunteered in the social care sector for 7 years and whilst at university, established an award-winning student zero-waste shop. She is passionate about social justice and environmental sustainability, and in her spare time volunteers as a Scout Leader and enjoys going for tea and cake with friends.

Jake is an entrepreneur, designer, and biologist passionate about sustainability. Previously, Jake founded VOSTIC, a company that manufactured and distributed a kelp-based replacement for plastic. Jake holds a master’s degree in Design Systems from Pacific Northwest College of Art and a bachelor’s degree in Biology from Lewis & Clark College. On weekends you might find him making music or snowboarding at Mt. Hood.