For most of the past year, since his invasion of Ukraine last February, Russian President Vladimir Putin has capitalized on his supposed energy omnipotence, holding the global economy hostage to his whims. Since last summer, President Putin has cut off natural gas supplies to Europe, leaving Europeans shivering and without heat in the winter to rebel against their leaders and make continued aid to Ukraine a political challenge. I was hoping that it would be physically impossible.
For most of the past year, since his invasion of Ukraine last February, Russian President Vladimir Putin has capitalized on his supposed energy omnipotence, holding the global economy hostage to his whims. Since last summer, President Putin has cut off natural gas supplies to Europe, leaving Europeans shivering and without heat in the winter to rebel against their leaders and make continued aid to Ukraine a political challenge. I was hoping that it would be physically impossible.
This threat was powerful. In 2021, a whopping 83% of Russian gas was exported to Europe. Russia's total global exports are 7 million barrels of oil per day and 200 billion cubic meters (bcm) of piped gas per year, accounting for about half of federal revenue. More importantly, Russia's primary product exports have played an important role in global supply chains. Europe relied on Russia for 46 percent of its total gas supplies, and was equally dependent on other Russian products such as metals and fertilizers.
Now, one year after Putin's invasion, it is clear that Russia has permanently lost its former economic power in global markets.
Thanks to Europe's unseasonably warm winter, Putin's period of greatest influence has passed without incident and, as we correctly predicted last October, he will be the biggest casualty of Putin's gas strategy. was Russia itself. Putin's natural gas influence no longer exists because the world, and most importantly Europe, no longer needs Russian gas.
Far from freezing to death, Europe quickly secured supplies of alternative gas by pivoting to liquefied natural gas (LNG) from around the world. This includes an estimated 55 billion cubic centimeters from the United States, which is 2.5 times the amount of prewar American LNG exports to Europe. Together with increasing supplies from renewable sources, nuclear and, in the interim, coal, these alternative supplies have reduced Europe's dependence on Russian gas to 9% of total gas imports. In fact, Europe is currently buying more of her LNG than it has ever bought Russian gas.
Moreover, Europe's unseasonably warm winter means not only that the worst-case scenario has been avoided, but that Europe's full storage tanks are barely depleted and will last into next winter. Germany's storage tanks were 91% full in January, a record level, up from 54% last year. This means that Europe will need to purchase significantly less gas in 2023 than in 2022.
The impact is significant. Europe is currently guaranteed sufficient energy supplies until at least 2024, providing sufficient time for cheap alternative energy supplies, both renewables and bridge fuels, to be fully deployed and operational within Europe. is given. This includes the completion of an additional 200 bcm/year of LNG export capacity by 2024, enough to completely and permanently replace Russia's 200 bcm/year of gas exports.
Furthermore, amid the “Russia-led supply crunch,'' the era when energy became expensive worldwide has ended forever. In addition to Europe's expected decline in LNG demand, China is shifting away from global LNG in favor of domestic sources. Coupled with the rapid increase in LNG supplies, it is no surprise that gas futures markets are setting lower gas prices than before the war for years to come.
Meanwhile, President Putin has zero remaining influence and no way to replace his former major client. He is discovering the hard way that it is much easier for consumers to replace untrusted suppliers of goods than for suppliers to find new markets. Already, President Putin is not making any real profit from gas sales. The 150 bcm of piped gas sold to Europe so far has been replaced by just 16 bcm of piped gas to China, barely enough to cover the costs, with pocket money from global LNG sales. For Putin, there is no market to replace anything close to that 150bcm deficit. China lacks the necessary pipeline capacity for at least a decade, preferring domestic, diverse energy sources anyway, and Russia's backward technology makes scaling up impossible. LNG exports are more than a slow trickle.
President Putin's oil influence has similarly declined. Gone are the days when oil prices soared 40 percent in two weeks on fears that President Vladimir Putin would remove Russian oil supplies from the market. In fact, in response to last month's introduction of the G7 oil price cap, which we helped develop, when President Putin announced a ban on oil exports to countries that accepted the price cap starting February 1, oil prices actually It fell to under.
why? Because it is now clear that the world no longer depends on Putin's oil. The oil market has shifted in favor of buyers rather than sellers as supplies increase, more than enough to offset a possible drop in Russian oil production. (In December, Russian Deputy Prime Minister Alexander Novak told Russian media that the government was prepared to cut oil production by up to 700,000 barrels in 2023.) Oil prices are now lower than they were before the war. , in the second half of 2022 alone. undulation Producing countries such as the United States, Venezuela, Canada and Brazil supply 4 million barrels a day. With even more new supplies expected this year, lost Russian oil will be seamlessly and easily replaced within weeks. And this time, Putin cannot force Saudi Arabia to embark on a bailout by drastically cutting OPEC+ production quotas, as he did last October. That's because the United States is currently suspending key arms and technology transfers to Saudi Arabia amid increased international scrutiny of OPEC+'s significant unused surplus production capacity.
President Putin's influence has also disappeared. G7 price caps give Putin a lose-or-lose choice, and Russia's energy status will be undermined no matter what Putin does. Although China and India do not explicitly participate in this cap, they are using it to drive intense trade with Russia, with discounts of up to 50 percent, making India a Despite buying 33 times more Russian crude than a year ago, Russia is not making much profit given its high transportation costs and break-even production cost of $44. . But if Putin cuts production further, as he has threatened, he will lose vital oil market share that he has long clung to as the oil market becomes increasingly oversupplied, and his own already oil-hungry This will further reduce income. cash.
All of Putin's other product cards have also been exhausted. His plan to weaponize food fell apart miserably when even his nominal allies turned against him. And in certain metals markets that Russia has historically dominated, such as nickel, palladium, and titanium, extortion-fearing buyers, coupled with rising prices, are driving reshoring and cutting into critical mineral supply chains and mining projects. It is revitalizing dormant public and private investment. These are mainly located in North America, South America, and Africa, where there are many untapped mineral reserves. In fact, in some important metals markets such as cobalt and nickel, the combined production of new mines opening over the next two years will be enough to permanently replace the Russian metal in global supply chains. Exceeds supply.
The failure of President Putin's economic strategy is yet another in an increasingly long list of miscalculations, from underestimating the Ukrainian people to underestimating the unity and willpower of the West.
Of course, the failure of President Putin's economic and energy wars is not without consequences. The ripple effects will impact many lives, altering supply chains and trade flows, and consumers will still feel the pinch of price hikes as new-found low prices take time to filter through the economy. There is.
But the important thing is that the end is in sight. Having permanently and irreparably weakened Russia's most powerful hands, its energy and commodity power, President Putin will never again be in a position to cause such chaos and disruption in the global economy. right. The battle on the battlefield is still on, but at least economic victory is in sight.