With historically high prices rippling around the world, what are the alternatives? Can we avoid major economic pain? What happens next, and what are ways we can get out of this mess? To understand all of the challenges ahead, Foreign Policy spoke with Meghan O’Sullivan, director of the Geopolitics of Energy Project at Harvard University’s Kennedy School, and Jason Bordoff, founding director of Columbia University’s Center on Global Energy Policy.
As Russia’s invasion of Ukraine rattles the global order, the world faces one of the biggest energy shocks in decades. Supply and demand have both been critically impacted as nations around the world rush to replace their dependence on Russian imports.
As Russia’s invasion of Ukraine rattles the global order, the world faces one of the biggest energy shocks in decades. Supply and demand have both been critically impacted as nations around the world rush to replace their dependence on Russian imports.
With historically high prices rippling around the world, what are the alternatives? Can we avoid major economic pain? What happens next, and what are ways we can get out of this mess? To understand all of the challenges ahead, Foreign Policy spoke with Meghan O’Sullivan, director of the Geopolitics of Energy Project at Harvard University’s Kennedy School, and Jason Bordoff, founding director of Columbia University’s Center on Global Energy Policy.
The following conversation was conducted for FP Live, Foreign Policy’s forum for live journalism, on Thursday, May 19. It has been lightly edited for length and clarity.
Foreign Policy: We’re living in a time right now of sky-high prices across the board. Is this because of the war or is this a supply problem? Is this because we’re coming out of two years of COVID-19 and demand has been pent up?
Meghan O’Sullivan: We’re talking about both demand and supply shocks right now. And on the supply side, there’s certainly the disruption that comes from the Russian invasion. And thus far, the disruption is largely due to self-sanctioning to basically traders and other buyers being a little averse to buying Russian crude. It’s led to some complications in the Russian industry, meaning that Russia’s production has come down a bit. But right now, the United States and the United Kingdom are the only countries that are not buying Russian oil. So the real big kind of disruption on the oil side could come when there is the [European Union] embargo on oil, which has been stuck because of a number of political reasons. So that certainly has had a major impact.
There’s also the fact that there are real questions around OPEC and OPEC’s ability to bring the amount of oil it says it can bring to market and its willingness to try to step in and actually supply more in a case of disrupted economies. But at the same time, on the demand side, we have a number of things going on. And the first and the most important there is just China and the fact that China is suffering from some COVID outbreaks that have led to these lockdowns that people know about—and that’s led to a dramatic decrease in Chinese energy demand. And, of course, that’s helped counterbalance the fact that there are some supply disruptions. So there’s a lot of push and pull in the market. I didn’t even mention the Strategic Petroleum Reserve, but the main point is there’s a lot at work here. Russia is a huge part of it but certainly not the only part.
Jason Bordoff: The energy crisis we’re seeing today, which I fear is going to get worse, not better, is driven in very significant part by Russia’s horrific invasion of Ukraine—but not entirely. We should not forget that Europe was in an energy crisis last winter, even before Russia invaded Ukraine. Now part of that was [because of] reduced Russian gas flows to Europe, but there was already a broader risk, which Meghan and I have written about, and I think this matters not only economically and geopolitically but matters a lot for whether we can sustain political support for stronger climate action that we so desperately need. If we act from a supply and investment side like we’re on track for our climate goals—but we’re not actually on track for our climate goals—the consequences [would be] market crunches and price spikes or an opportunity for maybe state-owned enterprises that are less susceptible to some of those social pressures and climate concerns to grow their production much faster, which are the plans Saudi Aramco has and [Abu Dhabi National Oil Company] has in the [United Arab Emirates] right now. So there was already concern in the market about potential underinvestment with the efforts to increase climate ambition over the last decade. The problem is oil use was going up and gas use was going up and we were facing all these supply chain problems coming out of the pandemic, which were certainly affecting the energy system too.
FP: What happened to America’s “energy dominance?” We can’t provide all the natural gas that Europe needs to backfill the Russians, and we’re still dealing with triple-digit oil and record-high gasoline prices.
MOS: When we look at the [liquified natural gas (LNG)] story, you can say that the United States isn’t able to step in and supply Europe entirely if it wants to go off of Russian natural gas. And that’s certainly true. But if we think about what the U.S. has been able to do, American LNG is going to be fundamental to meeting energy security while, at the same time, not completely forsaking the goal of trying to get to the climate goals that we need to reach.
Now, on the oil side, we’re definitely in a better position because we don’t necessarily have to import all that volatility and we’re not actually sending a lot of our money to countries that we have political concerns about. But in many ways, we’re in the same situation. The fact that OPEC is reluctant to open its taps more is influencing us almost in the same way that it would if we were still importing to give significant amounts of oil.
So I would say, it’s a mixed story there and that this crisis is going to be managed in part because of U.S. energy prowess rather than dominance. That’s a big part of the answer, but it’s not a panacea for us and for anybody else because of the nature of global markets.
JB: This has to be a moment when we are reminded that energy security comes not just from producing more or importing less but using less in the first place. And the United States went from importing two-thirds of its oil 10 or 15 years ago to being a net exporter last year, but consumers still face pain at the pump if something happens halfway around the world in Russia. There was a moment in the early 2000s when conservative national security hawks worked in tandem with left-wing progressive environmental groups to call on Congress to slash oil use because it was both a national security risk and an environmental risk. And then we kind of became complacent because we had energy abundance and the shale revolution, and we sort of lost that concern. And I think this is a reminder that reducing how oil intensive the economy is in the first place is not only important for climate security but for energy security too.
FP: Do you think that Russian President Vladimir Putin has overplayed his hand when it comes to Russia’s energy leverage, especially when it comes to Europe?
JB: I think the answer is yes. And this is self-defeating in numerous ways, not just only horrific in terms of the loss of life and the brutality in Ukraine, but it seems self-defeating for Putin economically and from the standpoint of energy, geopolitics, and myriad other ways.
We shouldn’t underestimate how short our memories are when it comes to energy crises. I think it’s fair to say Europe will never again feel comfortable, getting 40 percent of its natural gas from Russia. And this is going to accelerate a move to develop alternative sources of oil and gas diversification, connection to the other sources of supply, and a shift away from oil and gas to renewable energy and other clean energy sources, which doesn’t happen overnight, as well as increasing efficiency and demand conservation.
At the same time, it is possible to imagine three years or five or 10 years from now, when different leaders are in power, at a time of high-energy prices, that certain political leaders in Europe say, “You know what, that was a long time ago, but there’s really cheap energy right next door. We’re going to go back to that.” It’s hard to see now, but I can certainly see based on history that that might be a possibility in the future.
MOS: Putin may come to discover that his ability to shift and be an energy superpower feeding Asia, even if the Indians and the Chinese have taken a different approach, is more limited than he thought. He’s very well aware that while oil can be redirected, natural gas takes a lot longer, and there isn’t the infrastructure to redirect the natural gas going to Europe. There’s not even a market for it really at this point [of] the vast quantities of that kind of natural gas. But that infrastructure will take a long time to build. I think he’ll discover that the Chinese are not just going to open their doors and take as much Russian energy as Russia can offload to it because China’s concerned about its own energy security. And it’s had a policy of limiting how much one supplier supplies to the Chinese market by kind of 10 to 20 percent of what they import. And so the ability or the willingness to become really, really dependent on Russian energy, I think, is going to be quite limited in Beijing and potentially in other places as well.