The sanctions imposed against Russia in response to its invasion of Ukraine are not the first time oil embargoes have been used as a political tool. History tells us that the latest wave of embargoes will lead to positive long-term benefits: innovation, efficiency and more self-sufficiency.
Russia is among the world’s three largest oil producers and was the second-largest oil exporter. In the last two weeks the US, UK and Australia have announced various bans and phase-outs of Russian oil, natural gas and coal, and Germany halted the construction of the Nord Stream 2 Baltic Sea gas pipeline project, designed to double the flow of Russian gas direct to Germany.
Moscow has threatened retaliatory sanctions and warned of “catastrophic” consequences for the global economy if it closes its main gas pipeline to Europe, Nord Stream 1. The burning question is whether “normalcy” will ever return to the oil markets, or if Russia’s assault on Ukraine has permanently shifted the global energy dynamic. History tells us it will be permanent.
In the early 1970s, fossil fuel consumption was skyrocketing as industrialisation took off. This came to an abrupt halt when the Arab countries in the Opec oil cartel imposed an embargo on countries that supported Israel during the Yom Kippur War, including the US, UK, Canada, Japan and the Netherlands. This triggered the 1973 oil crisis.
Oil prices quadrupled. Though the ban was ineffective at moving the political needle, governments, firms and households in embargoed countries were forced to adapt. The crisis facilitated an expansion of energy conservation and alternative energy exploration. The consequences — including improved car fuel efficiency — are part of our lives 50 years later.
It is likely that this crisis will do more in a shorter period to diversify energy production than climate change activism could ever do. I grew up just outside Detroit, a vehicle manufacturing city. We were proudly home to the “Big 3" — General Motors, Ford and Chevrolet, the largest motor vehicle manufacturers in the US.
In the late 2000s, when car companies were being bailed out in the wake of the global financial crisis, people in Detroit who bought foreign cars — say a Honda or Toyota — were shunned. When my family moved to Sterling Heights in 1999, it was hardly racially diverse, and it voted for Donald Trump in 2016 and 2020. But this week it became one of many towns to mourn “Putin pricing” — the astronomical increase in fuel prices on the back of sanctions.
Oil prices reached a low of about $20 a barrel in March 2020, but two years later they hit $130 a barrel, a 13-year high last reached during the 2008 global financial crisis. Detroit isn’t a town that was notably fazed by the climate change debate, yet residents in my Trump-supporting, internal combustion vehicle-manufacturing hometown have begun talking about electric vehicles. “Putin pricing” has changed the game. Money talks, it turns out.
This is a snapshot of a larger dynamic. There is strong global consensus that Russia has gone rogue and needs to be sanctioned. But there is also strong concern that inflationary pressures need to be contained. This crisis is likely to usher in enhanced focus on energy efficiency and renewable energy. Countries don’t want their energy security to be beholden to political instability. After all, Putin’s erratic and unilateral behaviour is now hitting the wallets of billions.
There is a degree of fragmentation within the EU about what to do. The Netherlands is against an oil import ban, while France, Spain and Finland are open to it, and Slovakia and Poland are staunch supporters (understandably — the conflict is on their doorstep). However, the need to move away from relying on Russia is universally accepted. The EU has already announced that it will transition to alternative supplies and expand clean energy quicker to fill the shortfall, with the aim of making Europe independent from Russian fossil fuels “well before 2030".
The conflict is likely to usher in a new wave of investment into sustainable investment funds (SIF). During 2020, net flows into climate-labelled funds increased by an eye-watering 48%, probably because the Covid-19 pandemic alerted investors to the risk of catastrophic events. The Russia-Ukraine crisis is a second wake-up call, before the first one has even ended. SIFs are likely to see increased inflows as investors move away from fossil fuel-intensive projects and towards renewable energy.
It’s a pivotal moment for global energy security. The crisis is daunting, but the opportunity for reducing global reliance on tyranny is key.
• Dr Baskaran, a development economist, is a bye-fellow in economics at the University of Cambridge.
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