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The ‘Catch-22’ that may spare global oil supply from disruption if Russian invades Ukraine

February 9, 2022, 9:21 AM UTC

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.

Eamon Barrett
– eamon.barrett@fortune.com
@eamonbarrett49

CARBON COPY

Big Air

The Winter Olympics are in Beijing this week and images of the game’s Big Air venue—an isolated artificial snow slope built in the ruins of a metalworks factory—have fed narratives that Beijing is using the Winter Olympics to whitewash its poor environmental records. But the Big Air venue is actually a testament to the success of China’s urban renewal projects. The Shougang Industrial Park was shut 15 years ago, in preparation for the 2008 Summer Olympics, and has since been transformed into a bustling hub for shopping, art and, now, big air. CNN

Here comes the sun

President Biden decided to extend the duration of tariffs on imports of solar panel products, which the U.S. first introduced during the Trump administration. At the same time, Biden reduced the range of products subject to tariffs, cutting the number of levied products by half. U.S. manufacturers were disappointed by the move, which will increase competition from China, the world’s largest producer of solar panels and their components. But, if the U.S. is to meet its climate goals and increase domestic renewable energy production, it will need help from global manufacturers. NYT

Porkies

Conservation charity WWF has told British farmers they need to reduce meat and dairy production by a third over the next ten years if the U.K. is to meet scientific advice on lowering greenhouse gas emissions. The U.K. will also have to cut imports of soybeans, which are used as pig feed, by a fifth over the next decade to meet its climate goals, the WWF says. But the nation’s leading farmers union says agriculture is being unfairly blamed for pollution and claims that “every acre of land in agriculture is already less polluting by a factor of 20 in comparison to every acre of land in another [industrial] sector.” Guardian

On lithium

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

IN CASE YOU MISSED IT

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There’s a disappointing gap between companies’ promises about climate change and the actual results, study says by Nicole Goodkind

Corporate climate action, as told by 4 charts by Lance Lambert 

Ford’s CEO just made a convincing case to break his company up and go full EV by Christiaan Hetzner

CLOSING NUMBER

20%

A major scientific survey of global glacier volumes discovered far less water is stored in the frozen blocks than previously thought, which could leave millions thirsty as climate change forces the dwindling glaciers into retreat. On average, all the world’s glaciers hold 20% less water than expected—which means sea levels would rise less than thought, if all the glaciers melted. But no one wants that. Glacial runoff provides vital water on land. Glaciers in the Andes, for example, contain 20% less water than previously estimated yet feed river basins that support 4 million people. The Himalayas provided a lone exception to the research findings: glaciers in the Himalayan range actually have more ice than thought previously, by up 87%.

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