The audience has taken its seats. The curtain is going up. The rehearsals during recent weeks are over. The real drama is about to begin. But it is still unclear whether it will be a farce or a tragedy. Such is the theater in prospect for international energy markets over the next few weeks. The script has yet to be finalized but some of the lines have been tested with the public over the past month or so.
Because it is wintertime, at least in the Northern Hemisphere, everyone came to the performance wearing a coat. But the days are already growing longer, and most people are hoping for some warmth of an early spring and a decline in household energy bills, at least until summer temperatures cause the air conditioning to be turned up.
That should result in lower prices of oil and natural gas as demand eases. But so far it hasn’t happened. Oil is heading almost remorselessly for $100 per barrel, and some on Wall Street suggest $120 could be in prospect. Natural gas, at least in its internationally traded, ultra-cooled liquid form, is selling for around $20 per million BTU (that’s a British thermal unit, but let’s skip the exact origins of the term). It has been $5 or lower.
A good play needs a villain and Russian President Vladimir Putin fits the role perfectly. His threats against neighboring Ukraine trigger a range of horrific historical comparisons in the West. The ones Moscow prefers are different.
Additionally, for energy-watchers, it is centrally about oil and gas. Putin holds several aces in his hand. It’s Russian gas that keeps Ukrainians warm. Kiev benefits from transit fees from Moscow for gas piped across the country to customers in Eastern Europe, but that could be cut off, literally, by turning a tap.
Germany is highly dependent on Russian gas, originally pumped across Ukraine, but soon to come via a new pipeline — the Nord Stream 2 — on the seabed of the Baltic, to avoid pesky transit fees by third countries. U.S. irritation over this and other issues with its powerful, but risk-averse ally, is becoming hard to hide. German Chancellor Olaf Scholz is scheduled to meet with President Biden on Monday to discuss tensions.
Meanwhile, the high price of oil means that Moscow’s revenues are doing well, and a good portion of the funds come from fields in the Russia Far East, close to markets in Asia.
The West, in general, and the United States, in particular, have poorer options. Moral indignation counts for a little but public opinion isn’t a winning card. The tightness in the oil market could be reduced by greater OPEC production, but the cartel now works hand-in-hand with Russia, as OPEC+. President Biden’s incredulous request to OPEC to increase its volumes significantly was ignored.
The most obvious short-term solution may be for tiny, but gas-rich, Qatar to shift some cargoes from Asian destinations to Europe. But Europe lacks many liquefied natural gas (LNG) offloading terminals. The subject was discussed when Emir Tamim bin Hamad Al-Thani visited the White House a week ago. Qatar appears willing to cooperate but wants Washington to do the heavy lifting, negotiating with the Asian customers whose cargoes would be delayed. Meanwhile, American LNG is arriving in Europe — but the impact is marginal.
Domestically, voters better understand high energy prices and higher gasoline costs than the intricacies of Russia-Ukraine tensions. So, the crisis is a hard one for the White House to spin in its favor.
Perhaps — and it’s a big “perhaps” — Putin could be outmaneuvered by his country’s traditional best defense: the Russian winter. Deep snow and bone-chilling cold defeated first Napoleon’s foot soldiers and then Hitler’s tanks. Could a bad storm now demoralize his forces that are threatening Ukraine?
It’s a thought, but such a twist in the plot may be stymied by a more contemporary weather development: global warming.
Simon Henderson is the Baker Fellow and director of the Bernstein Program on Gulf and Energy Policy at the Washington Institute for Near East Policy. Follow him on Twitter @shendersongulf.