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Changing Dynamics Of Energy: OPEC, Russia, And The Energy Crisis

The article highlights the evolving situation in Europe and elsewhere in the aftermath of the Russian Invasion of Ukraine. Since the invasion, Russia has used energy resources including oil and gas as weapons of war which has resulted in energy shortage and high inflation, particularly in Europe.








The Organisation of Petroleum Exporting Countries (OPEC) has been the leading force in the global oil market since its formation. Often regarded as a ‘cartel’ (Griffin, 1985; Jones, 1990), OPEC is known to manipulate oil prices for its gains. With the addition of non-OPEC oil producers to the group, called OPEC+, the ‘super cartel’ now controls more than 55% of the oil production, which includes Russia. It becomes imperative to look at OPEC against the backdrop of Russia’s Ukraine invasion. The Ukraine war has changed the energy dynamics for Russia, Europe, and the world. Countries are looking at an energy crisis, Europe being the most affected. Europeans have to shell out more money for fuel and daily items as they face a high inflation rate. Some countries like Spain and France are tackling the crisis better than others who face a challenging energy future (Al Jazeera, 2022). In this situation, OPEC's role is essential for Europe and the whole world.


War and the energy crisis

To understand OPEC’s role better, we must also look at the crisis caused by the Russian invasion of Ukraine and what changes it made to the energy dynamics. Ukraine’s invasion by Russia has made lasting impacts on the world economy. The most affected Europe got hit by roughly $1 trillion from surging energy costs (Bloomberg News, 2022). Russia was the leading supplier of crude oil, natural gas, and fossil fuel (57.5% of total energy imports) to the EU before the war (Eurostat). This created an issue after the Russian invasion of Ukraine as geopolitical tensions increased. Russia has used its energy dominance as a geopolitical weapon, reducing the supply of natural gas flowing westward and worsening an existing energy crunch (Colgan, 2022). Russia has cut gas flows to the EU by 80% between May and October 2022, as per the World Economic Forum (WEF, 2022), which forced the states to look for alternatives, especially with the high energy requirements of winter on the horizon. Imports from US and UK have increased in the second half of 2022, along with other sources like Saudi Arabia, the OPEC leader. EU’s huge reliance for energy on Russia provided leverage to Moscow among the West’s condemnation of the invasion. Price volatility, supply shortages, security issues, and economic uncertainty have contributed to what the International Energy Agency (IEA) calls “the first truly global energy crisis, with impacts that will be felt for years to come.” The most noticeable impact is the rising energy prices. The energy crisis means 70 million people who recently gained access to electricity can no longer afford it. And 100 million people may no longer be able to make food with clean fuels, returning instead to biomass, the IEA says. On this background, OPEC’s decisions as a dominant ‘cartel’ are very influential and can alter the course of the world economy.


OPEC and OPEC+

In 2021, OPEC estimated that its member countries accounted for more than 80% of the world’s proven oil reserves (WEF, 2022). Because of this enormous market share, OPEC decisions affect the global oil market and influence prices, despite the US emerging as the largest crude oil producer (14.5% of total world production). OPEC’s ability to influence the global market has already been witnessed several times in the past, including the first oil shock in 1973, the Iran-Iraq war in the 1980s, the global financial crisis in 2007-08, and the COVID-19 pandemic. The energy crisis after the Ukraine invasion in February last year is the latest example displaying OPEC's abilities.

The aftermath of the Ukraine invasion is that the West has imposed several sanctions on Russian oil. The EU imposed a partial embargo on Russian oil, prohibiting sea shipments of oil to the EU. Furthermore, the G7 put a price cap on crude oil in December 2022 (Gardner, 2022). Sanctions coupled with reduced imports from multiple countries after the war resulted in falling prices of Russian crude oil compared to June 2022 levels, when the prices soared dramatically. To ‘support stability and balance in the oil market’ (statement by Saudi Arabia), OPEC+ consisting of Russia, in October 2022, decided to cut production by 2 million barrels a day- the most significant cut since April 2020. Reduced production resulted in overall increased prices; thus, Washington vehemently opposed the decision. The US National Security Council spokesman John Kirby argued that the cut would boost Russia’s oil revenues, a considerable contribution to the Russian treasury to finance the war. The production cut has put OPEC in command of the energy situation. According to a recent report by Goldman Sachs, in 2022, OPEC became successfully proactive for the first time in decades.

Unlike the US and the EU, the leader of OPEC, Saudi Arabia, has not imposed any sanctions on Russia. Moreover, the decision for the production cut is said to be unanimous (WEF, 2022), which can be argued as direct support for the Russian invasion. However, the situation is not so black-and-white. OPEC faces threats on many fronts- the US increasing its crude oil production, increasing renewables investments, and pushing for a net-zero future. In order to counter these challenges, OPEC needs to retain its influence on the energy market. Hence it cannot afford to lose Russia by openly condemning its actions.

This situation has changed the energy dynamics. Previously, Russia’s most significant export of oil and natural gas went to Europe. Even though a large share of European energy imports still come from Russia, the EU wants to break the reliance by increasing domestic production, investing in renewables, and importing from the US (although expensive). Russia has found new customers in India, China, and Turkey, whose energy demands were previously primarily met by the OPEC countries. India and China now account for more than half of Russian seaborne oil exports, with exports from more than 27 EU member states in March 2022 (BBC, 2022). Russia is now China's biggest oil supplier, taking over from Saudi Arabia. In my opinion, this arrangement is highly unlikely to change as the European Commission plans ‘to make Europe independent from Russian fossil fuels well before 2030’.


Conclusion

According to Alhajji (2016), Saudi Arabia has killed OPEC, and it cannot be revived. It is just a toothless zombie, attracting attention but without having any impact on the living. However, the current global energy crisis seems to breathe new life into OPEC, offering it a chance to solidify its hold on the market. Goldman Sachs reckons oil now enjoys a revived and powerful “OPEC put” that will keep prices high. As for OPEC+, Russia might lose some of its influence in OPEC+, primarily supported by Saudi Arabia to date. It remains to be seen how Russia tackles the international political backlash, threatened business, and the heavy financial burden of the war.




This article represents the views of contributors to STEAR's online digital publication, and not those of STEAR, which takes no institutional positions.



 


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