Over the weekend, we saw how political turmoil in Ukraine was followed by Russian military action. Today, we are seeing one result – sharply rising prices on the spot market for natural gas and oil. Heating oil has increased over 6 cents. Markets are responding as thousands of Russian troops solidified control over Crimea in the Ukraine. The U.S. warned Sunday that Moscow could face economic penalties unless it retreats.
Russia is the world’s second largest producer of petroleum and the largest exporter of natural gas. The lion’s share of its oil exports go to Europe, which is the main reason the market has responded even though the risk of actual delivery outages appears to be small at this time. The questions facing us now are whether Russia will persist in Ukraine and whether the US and NATO allies will actually respond with serious economic sanctions.
We are not experts on international affairs here by any means. But we do know that the US has greatly reduced the percentage of total energy supplies that we import. You have all read about how domestic energy production has increased dramatically – in the forms of oil, gas, and renewables. At the same time, great strides have been made in energy efficiency.
Nonetheless, petroleum and natural gas are commodities traded and priced internationally. And today, the vast majority of reserves and production remains under the control of regimes that are not always favorable to American interests, such as Persian Gulf nations, Russia, and Venezuela.
Furthermore, American’s energy security is, of course, tied to that of our allies in Europe. And since Europe is significantly dependent upon Russian supplies of fossil fuels, then it may be difficult to impose strict sanctions on Russian exports to Europe.
A price spike of one day is one thing. We may find out that tensions will subside and that should cause oil and gas prices to retreat as quickly as they rose. On the other hand, Vladimir Putin may decide that he would prefer to play an extended game of chicken. If that’s the case, we may be in for a long ride up the roller coaster before we take another long ride down. In the long run, Russia needs to sell oil and gas as much as Europe needs to buy it.
Why are we talking about this? In the short term, to hopefully understand what’s happening in the market. In the long term, to hopefully understand that renewable energy and energy efficiency are more important than ever if we want to make world leaders like Putin less important.