The ‘Catch-22’ that may spare global oil supply from disruption if Russian invades Ukraine
While Russian President Vladimir Putin is visiting Beijing for the Olympics, back home, Putin’s troops are amassing on the Russian border with Ukraine and threatening an imminent invasion.
According to U.S. officials, the roughly 100,000 Russian infantry currently stationed along the Ukraine border are just 30% short of the critical mass needed to support a full-fledged invasion of the country. Last week, the White House warned an invasion could come “any day.” Western allies are airing threats that they hope will deter Putin’s incursion, warning that a Russian land grab in Ukraine will be met with sanctions on Russian exports and oligarchs.
But, according to analysts at Morningstar, there’s one export Western governments won’t sanction: oil.
“Leaders face a Catch-22 situation,” says Dave Meats, Morningstar’s director of energy and utilities. “Oil sanctions severe enough to hurt Russia would also cause economic misery at home, whereas sanctions mild enough to be tolerable for voters would probably have no effect.”
The cartel of oil producing nations—plus Russia—have been gradually resuming supply to pre-pandemic levels since August last year, but the ramp up is slow and has kept oil prices at a premium. In previous months, U.S. President Biden has repeatedly called for OPEC+ countries to release more oil reserves.
Meats says the optics of Biden begging for more oil while also sanctioning supplies would be “awkward to say the least.” So, Meats expects Western leaders will steer clear of sanctioning Russian oil, even though it would be one of the most effective deterrents against a Russian invasion.
Energy accounts for 60% of all Russian exports, which in turn account for 30% of Russian GDP. But targeting oil would hurt the U.S. and Europe too much. Meanwhile, an actual invasion of Ukraine and the terror of war—which the Biden administration says could leave 50,000 civilians dead—is unlikely to disrupt Russian oil supplies. The pipelines to Europe pass through Belarus, a begrudging Russian ally, north of Ukraine.
Rather than target oil, Biden has instead leaned on Russia’s other major energy export: gas.
On Monday, Biden told German Chancellor Olaf Scholz that he should shutdown Nord Stream 2—a gas pipeline linking Russia to Germany and Europe—if Putin invades Ukraine. But Scholz remained noncommittal and avoided specifically threatening Nord Stream 2.
Europe is in the midst of a bruising energy crisis, with prices soaring on the back of limited gas supplies, and blocking a Russian pipeline would agitate costs higher. Russia is also less dependent on exports to Europe than it used to be.
Chinese imports of Russian gas surged 50% in 2021, and the two nations last week struck a new 30-year supply contract, to be settled in euros. Some analysts even speculate Putin agreed to postpone a Ukraine invasion until after the Winter Olympics as a favor to China President Xi Jinping. That means Western allies have two more weeks to find a way to deter him—apparently without targeting oil.
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Here comes the sun
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Lithium prices surged fivefold last year, becoming the best performing commodity on the market. But the soaring cost is causing concern among car makers. Electric vehicles commonly use batteries that rely on lithium and the rising commodity price is not only increasing costs for manufacturers but also sparking fears that supply is dwindling. Supply is set to boom in coming years, as more miners pile into the lucrative lithium space, but that’s creating more headaches for traders and car makers, as forecasting future costs of the hot product turns complex. Bloomberg
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