Putin is winning the war in the energy markets. Prices rose when Russia imposed counter-sanctions against Europe.
Vladimir Putin, the Russian president, is succeeding in the energy markets regardless of the metric one chooses. In order to finance the invasion of Ukraine and secure domestic support for the war, Moscow is milking its oil cash cow, making hundreds of millions of dollars every day. The region’s governments will have to make some difficult decisions once European sanctions against Russian oil shipments go into effect in November and the energy crisis starts to affect customers and businesses.
Since Putin can now sacrifice gas money and restrict supplies to Europe thanks to the surge in oil revenues, electricity rates for households and businesses are expected to soar starting in October. While certain municipal utilities in Germany have already issued a warning that prices will rise by more than 100%, UK rates are anticipated to increase by 75%. Western governments will face increased pressure to spend billions either subsidizing consumer bills or, as is already the case in France, seizing control of powerful corporations and businesses as a result of Russia’s successful attempt to weaponize the energy supply. The benchmark one-year ahead price of German power has risen to an all-time high, which is around ten times more than its pre-crisis level. Russian crude oil production is the first sign of how Putin has changed the oil tide. With an average of nearly 10.8 million barrels per day in December, the nation’s output nearly reached pre-war levels. This is only slightly less than the 11 million barrels pumped in January, just before the invasion of Ukraine. According to estimates from the industry, oil output has risen a little bit so far this month. This year’s low point of 10 million barrels was reached in April when European consumers began to flee Russia and Moscow was forced to rush to find new customers. July was the third straight month of oil production recovery, with output much higher than that low point. Following a steep decline in March and April, Russian oil production has recovered and is now almost back to where it was before the invasion of Ukraine. After a brief battle, Russia has discovered new markets for the million or so barrels per day that European oil refiners have ceased buying as a result of self-sanctioning. The majority of the crude is going to Asia, particularly India, but it also ends up in Turkey and other Middle Eastern countries. And some of it is still making its way to Europe, where traders are still buying Russian crude in advance of the official sanctions that are supposed to go into effect in early November. Russian oil’s price serves as the second indicator. Moscow had to initially offer different sorts of crude at steep discounts to attract customers. But in recent weeks, the Kremlin has reclaimed its price power by capitalizing on a competitive market. Moscow is discovering new commodity traders who are eager to buy its crude and ship it to hungry markets. These traders are frequently based in the Middle East and Asia and are likely funded by Russian capital. The Kremlin is receiving a lot of money with Brent crude trading at close to $100 per barrel and Russia being able to provide lesser discounts. Energy sanctions aren’t working right now, at least. The last metric of Russian success is political as opposed to commercial. Western policymakers had high hopes that the OPEC cartel, which is headed by Saudi Arabia and the United Arab Emirates, would break its ties to Russia back in March and April. The situation has been the contrary.
In the open, European governments continue to be adamant about their intention to gradually wean themselves from Russian energy. They must be aware, in private, of the harm that position could do to their economy. Putin is winning the oil war, but let’s hope that leverage won’t be strong enough to convince Western leaders to change their positions in the actual conflict.