WILL THE RUSSIAN-UKRAINE WAR TRIGGER A NEW ENERGY CRISIS?

Rıza Mehmet KORKMAZ
UGM General Manager

On the morning of February 24, 2022, the world woke up to shocking news. The Russian Federation launched a military operation against Ukraine, further escalating the crisis, whose footsteps were heard in Putin's recent statements. We call it a military operation Because, in fact, since the two countries have not "officially" declared war on each other, technically, there is no war. But a fierce war continues due to the loss of life and property, as well as its impact on the world economy and politics.

SUPPLY CHAIN ​​PROBLEM IN ENERGY AND FOOD…

Our world, which has been shaken by the COVID-19 pandemic for the last two years, has faced another problem with this largest-scale conventional conflict in Europe after the Second World War: a supply chain problem in energy and food.

The war that broke out in these two countries neighboring our country in the Black Sea worried Turkey and put it in a problematic situation. The risk of the war spreading to more significant regions or even turning into a world war; Concerns about the possibility of an attack on nuclear power plants in Ukraine and a new environmental disaster; The new refugee influx and the human tragedy created by the hot conflict in the middle of Europe; The problems that began to be experienced in the food supply chain with the restriction of product shipments from this region, which meets more than 30 percent of the world's grain needs; The heavy sanctions imposed by the USA and EU countries on Russia, which is the leading energy supplier of the EU and Turkey, and the subsequent countermeasures taken by Russia, left the whole world facing a new and deep crisis. The decisions to sanction Russia have long-term effects, even if the war ends.

In this article, we leave the impact of the war in other areas to the valuable opinions of our other writers. How can the world and Turkey be affected by this war in the field of energy? We will look for the answer to this question.

PREVIOUS ENERGY CRISIS IN THE WORLD…

The energy crisis that came to light with the Ukraine-Russia war also reminded us of previous global energy crises. In the modern era, the world has witnessed many energy crises, or more precisely, oil crises. So, what should we understand from the oil crisis? An oil crisis refers to a significant and sudden increase in oil prices accompanied by a decrease in supply. Since oil is the primary energy source for developed industrial economies, the shortage of oil supply and the sudden rise in prices seriously endanger the global economy.

1929 ECONOMIC CRUSH...

When we look at the recent history of energy crises in World II, although oil prices rose in the early 1920s, especially in the period before World War II, due to the significant increase in automobile production, it is observed that there were also significant decreases in prices with the contraction in demand caused by the 1929 Economic Depression.

OIL CRISIS IN 1973…

In the post-World War II period, when oil began to have a much more important place in the world energy supply with economic growth, two major oil crises occurred. The first started in 1973, when OPEC members, consisting of Arab countries, decided to increase oil prices nearly fourfold to $12 per barrel. With the embargo decision taken under the pressure of the Arab countries in OPEC, as a reaction to the support of Western countries after the Yom Kippur War that Israel waged against Egypt and Syria in 1973, An embargo was imposed on the USA, Japan, and Western Europe, which consume more than half of the world's energy supply. Oil exports to these countries were banned (Arab Oil Embargo). The global capitalist economy faced rising inflation with this embargo decision and deeply felt the need to find alternative energy sources. Although the oil embargo was lifted in 1974, oil prices remained high, and the world economy fell into recession throughout the 1970s.

OIL PRICES AFTER 1990…

As can be seen in detail in the table below; Although Brent oil prices hit $23.19 ($75.12 at 2022 prices) in 1990, they remained below the $30 threshold ($51.41 at constant prices) until 2004. A price of $11.91 was even seen in nominal prices in 1998. Then, crude oil prices, which started to rise again in 2004 with the increase in demand due to the high growth in Asian economies led by China, reached its historical peak in June 2008, reaching $ 126.33 ($ 166.90 at constant prices). Crude oil prices, which eased again in February 2009 with the global economic contraction and fell below $40 ($42.99 at constant prices), then rose again and reached another peak in April 2011, reaching $102.15 at nominal prices. Although the barrel price of Brent oil, which followed a volatile course with ups and downs in the 2010-2020 period, fell below 30 dollars at current prices (the lowest level was $ 15.99 on April 22, 2020, West Texas type) with the pandemic-related decrease in demand as we entered the 2020s. The barrel price of (WTI) crude oil (at $7.37) also increased with the revival of the economy; It reached an average of $60.84 (at nominal prices) in 2021 and a sudden climb, especially after the Russia-Ukraine war, reaching $128.38 on March 8, 2022, reaching an average of $101.92 in March 2022.

Especially when the period after 2010 is examined; The barrel price of Brent oil, which was between 90-100 dollars in the first five years, traded between 55-65 dollars on average in the second five-year period; During this period, it was observed that prices fell following the decreasing demand, as the OPEC countries dominated by Saudi Arabia and Russia, one of the world's largest natural gas and oil producers, did not agree on the price.

As a result, wars or political crises in the main crude oil-producing regions of the world are immediately reflected in the prices and lead to serious increases.

THE IMPORTANCE OF THE RUSSIAN FEDERATION IN THE WORLD ENERGY SUPPLY…

As the country with the largest land area in the world, the Russian Federation also has very rich natural resources. Russia, among the most important producers in the world in producing many minerals, is also very rich in energy resources. As can be seen from the table below, more than 10 percent of the world's energy resources and nearly 15 percent of oil and gas production belong to the Russian Federation. Russia meets 10 percent of world oil consumption. At this point, it is obvious that a supply crisis or shortage in the Russian Federation, which is among the world's most important crude oil, natural gas and coal producers, will cause problems in the world energy supply. The increase in world crude oil and natural gas prices with the start of the Russia-Ukraine war has demonstrated this.

Crude oil and natural gas prices increased significantly after the war. The Brent oil price, $93.60 a barrel on February 23, the day before the Russia-Ukraine War, reached $128 on March 8, 2022, and rose above $120 as of June. Again, the day before the war, while the megawatt-hour price of natural gas was traded at 87.76 euros on the Netherlands-based virtual natural gas trading point TTF, after the first day of the war, the prices jumped to 130.66 euros, breaking a record on March 7, reaching 217.3 euros. ; Subsequently, with the statements from Russia, stability was partially restored and prices fell below 100 euros. European countries, especially Germany and Italy, which supply 41 percent of their natural gas needs from Russia, have faced a serious problem.

PRICE INCREASES HAVE ALSO OCCURRED IN COAL…

The price increases experienced in oil and natural gas were also seen in coal. The International Energy Agency report pointed out the energy crisis in China and stated that coal demand increased rapidly in the first half of 2021, causing sharp increases in prices. The report states that coal prices reached the highest level in history in October 2021, at $298 per ton. However, it was emphasized that the demand will continue this year due to global natural gas and LNG demands.

Therefore, it would not be wrong to say that an energy crisis is currently emerging. The question is how long this crisis will last and whether it will grow.

THE NEXT COURSE OF THE ENERGY CRISIS…

The report published by the US Energy Information Administration in December 2021, before the Russia-Ukraine War started, stated that oil demand exceeded supply by 1.7 million barrels per day last year; This situation will continue in the first half of 2022; It was noted that the supply-demand balance could only be achieved in the second half of the year and this would create upward pressure on oil prices. In the report published by JP Morgan in December 2021; It is estimated that oil prices may rise to 125 dollars per barrel this year due to OPEC's production cuts.

With the war going on now, the prices predicted for the end of the year were almost reached in the first quarter of the year. Due to the increase in oil prices, gasoline prices in the United States have approached $6 per gallon, the highest level since 2014. The increase in Turkey is much more striking (130 percent in the first 6 months) due to the increase in foreign currency.

Due to the sanctions imposed on Russia, EU countries have not yet completely stopped purchasing oil and natural gas from Russia. If the war reaches more dramatic dimensions and the sanctions measures, which currently exceed 10 thousand, are further harshened, there is a possibility that oil and natural gas purchases from Russia will be stopped completely. This situation will herald a bigger energy crisis, especially for the EU. According to JP Morgan in their latest reports, it is predicted that the barrel price of Brent oil may rise to 185 dollars by the end of the year, and according to Goldman's estimate, it may rise to 175 dollars; Expansion of the embargo could trigger even larger price increases and bring the risk of crude oil prices reaching above $200.

EFFECTS OF THE WAR ON TURKEY'S FOREIGN TRADE

Unfortunately, the Russia-Ukraine War has negative consequences for our country. The war that broke out in two countries, one of Turkey's most important foreign trade partners, has definitely affected our country. The Russian Federation ranks 2nd after China in our imports and 10th in our exports. Ukraine ranks 12th in our imports and 20th in our exports. Turkey ranks 4th in Ukraine's exports with a 4.9 percent share in 2020, and 4th in Russia's exports with a 4.7 percent share. Therefore, both countries are of critical importance for Türkiye.

When you examine the tables below; It is seen that with the start of the war, our exports to Russia decreased by approximately 20 percent, and imports increased by approximately 80 percent due to increasing oil and natural gas prices, thus our foreign trade deficit increased.

When we look at our foreign trade with Ukraine; As of the first five months, it is observed that there was a 26.7 percent decrease in imports and a 38.5 percent decrease in exports.

Source: TURKSTAT

Rising energy and grain prices due to the effects of the war also negatively affect our foreign trade balance. When Turkey's foreign trade data for the January-May period of 2022 is examined in the table below; It is seen that hydrocarbon imports increased by 163.4 percent in value, and the prices paid for grain imports increased by 516.6 percent only in May, and there was an increase of 58.8 percent in the first five months. Therefore, if the war continues, Turkey may reach the figures it paid in 12 months last year (50.6 billion dollars), especially in energy imports, before the end of the first 7 months, due to rising prices; It is seen that our total energy import bill may exceed 75 billion dollars.

Source: TB & TURKSTAT

SEEKING SOLUTIONS AGAINST THE ENERGY CRISIS

Huge increases in crude oil prices, fluctuating trends and foreign dependency have led states to focus more heavily on alternative energy sources such as hydroelectric power plants, geothermal energy, solar and wind energy, and nuclear power plants. As can be seen in the table below; While the share of crude oil in the world energy supply was over 50 percent in the 1970s, it has fallen below 40 percent today (31.2 percent by 2021). However, our world is still dependent on coal (its share is 27.2 percent), crude oil (its share is 31.2 percent) and natural gas (its share is 24.7 percent). The share of renewable energy in this table is only 12.6 percent (hydroelectric, wind, solar, etc.).

Although solar and wind energy are clean, winter days with little sun and windless days cause significant production risks, especially in many European countries. Hydroelectric production also depends relatively on climatic conditions and rainfall regime. Nuclear energy remains, and countries are taking steps in this direction. For example, Belgium postponed its decision to abandon nuclear power for 10 years, while Germany is reviewing its decision. In this context, the Akkuyu Nuclear Power Plant Project is an important and strategic step for our country.

On the other hand, the policies implemented in the EU due to the "Green Energy Transformation" and the target of zero carbon emissions in 2050 have significantly increased Europe's dependence on natural gas, especially in the last 10 years. The increase in natural gas consumption was mainly achieved by imports from Russia, Norway's production and liquefied natural gas (LNG) supply. However, after the energy crisis, it is observed that the EU and other world countries are considering increasing the share of coal in electricity production.

RECOMMENDATIONS OF THE INTERNATIONAL ENERGY AGENCY TO THE EU…

As countries grapple with the energy crisis, they are not just focusing on increasing energy production, but also on energy-saving measures and electrification. The International Energy Agency (IEA) has put forth a series of recommendations to the European Union, which serve as a roadmap for addressing the crisis. These include reducing the speed limit on highways, implementing odd-even license plate rules in cities, expanding and making public transportation more affordable, reducing thermostat settings in heating by two degrees, and increasing the insulation target for 1 percent of the total building stock for Green Transformation to 2 percent. These measures, if implemented, can make a significant impact, with the gain from insulation alone being equivalent to the 20 billion cubic meters of gas per year that Germany receives from Russia via Nord Stream.

ELECTRIFICATION AND TRANSITION TO HYDROGEN FUEL IN VEHICLES…

The transition to electrification and hydrogen fuel in vehicles, which have an important place in world energy consumption, is anticipated to accelerate further in the coming period. According to the latest report by the International Energy Agency, the market share of electric vehicles in global automobile sales increased from 4.11 percent in 2020 to 8.57 percent in 2021. While electrification in transportation must be increased to achieve global emission targets and reduce dependence on oil, the current annual capacity of 160 gigawatt-hours in battery production for electric vehicles is aimed to reach 6,600 gigawatt-hours in 2030, and the market share of electric vehicles to exceed 30 percent.

Another crucial lesson learned from the Ukraine-Russia War is the necessity of creating supplier diversity rather than relying on a single supplier. As in the Russia-EU example, dependence on a single country for natural gas or oil causes serious supply problems. This underscores the urgent need for countries to make new agreements with alternative suppliers, ensuring a more resilient and secure energy supply chain.

Another solution is to increase possible local production opportunities by focusing on oil/natural gas exploration activities. At this point, Turkey has recently focused on natural gas exploration and has managed to discover some new resources in the Black Sea, which is a promising development. The commissioning of this resource, even partially, in production in 2023 will begin to provide significant relief to our country, offering a glimmer of hope in the midst of the global energy crisis.

It is possible to say that the war will not end in the short term and that more difficult days are ahead in the global energy crisis, and that the situation may become more difficult, especially with autumn.

As a result, while we are intensifying diplomatic steps for peace, we must also take a holistic approach to the supply problem caused by war, diversify supply channels, and seek multifaceted solutions to the issue.