The “energy crisis” current core of geopolitical and geoeconomic risk

Why are there high geoeconomic risks in the energy sector?

Reserves of fossil fuels such as oil, natural gas, and coal are finite and unevenly distributed. The major areas supplying fossil fuels include the Middle East, North America, Russia, and Australia, and energy prices are significantly impacted by the political situation in these countries and regions. The Middle East in particular is known for frequent conflicts and political instability.

Risks also lie in transportation. When fossil fuels are transported by ship or pipeline, they often have to pass through maritime chokepoints or countries in conflict, creating challenges around the safety of sea lanes.

Moreover, energy supply is sometimes used as a means to achieve geopolitical objectives. In a conflict between countries, the country supplying a resource can stop exports at a level that benefits itself; similarly, a purchasing country can stop imports from a specific country as a way to apply pressure. This risk was exposed all too clearly by the energy crisis that broke out in the wake of Russian invasion of Ukraine.

How are European economies affected now?

Following the invasion of Ukraine, Western countries imposed measures to suspend imports from Russia. However, economic sanctions against Russia, the world’s largest energy supplier, led to energy insecurity and are seriously impacting peoples’ lives.

While the shale revolution has enabled the U.S. to be energy self-sufficient, Europe is at a greater disadvantage because of its high dependence on Russian gas supplied through pipelines, with this accounting for nearly 40 percent of its total natural gas procurements in 2019 (2020 BP statistics).

The average gas bill for a single-family home in Germany has more than doubled since 2021. In the U.K. as well, electricity and gas bills soared, leading to frequent protests and deepening political turmoil.

Economic sanctions can be a double-edged sword as they can also damage the economy of the imposing side. Looking at GDP growth rates, for example, the U.S., Europe, and Japan have repeatedly made downward revisions after Russian invasion of Ukraine. There are also fears of stagflation, in which inflation and recession occur simultaneously.

On the other hand, underpinned by strong Indian and Chinese demand for Russian oil, projections for the Russian economy have been repeatedly revised upwards (see table below). Indeed, it may be that the economic sanctions are more damaging to the West and other countries than they are to Russia.

Source : IMF, World Economic Outlook

However, sufficient analysis of the blowback damage from sanctions in the energy sector has not been made. In addition, no country has imposed sanctions on Russia for the enriched uranium necessary to fuel nuclear power plants. That is because the U.S. and Europe both depend on Russia for about 20 percent of their enriched uranium, a supply they do not wish to see cut. Astute assessment of the double standards of the West imposing such sanctions is necessary.

What are Japan’s geoeconomic risks with respect to energy?

Japan has the world’s third-largest GDP but an energy self-sufficiency rate of just 12 percent, the lowest among the G7 nations. Japan relies on imports for 99.7 percent of its crude oil, 97.7 percent of its liquefied natural gas (LNG), and 99.6 percent of its coal. Notably, Japan depends on the Middle East for about 90 percent of its oil.

As an island nation, Japan cannot import electricity from other countries through the grid, as can be done in Europe, and so the diversification of import sources is extremely important from the aspect of energy security. JBIC, in collaboration with the Japanese government, strives for long-term energy security by maintaining lines of communication with resource-producing countries to gain an astute understanding of their intentions.

In order to achieve carbon neutrality by 2050, thermal power generation using natural gas or LNG is considered essential for resource-poor countries like Japan. Because natural gas and LNG emit less carbon dioxide than oil or coal, they are expected to play roles as bridging fuels in the transition to renewables.

The invasion of Ukraine disrupted that scenario, however, and there is now fierce competition for natural gas and LNG across the globe. The year 2023 will indeed be the crucial period for securing a stable, long-term energy supply system.

Could you talk about fossil fuel market trends, particularly around oil?

The global trend toward decarbonization has led to fossil fuel divestment. In fact, investment by Big Oil fell by as much as 49 percent between 2015 and 2021, and this was one of the factors in the soar in energy prices, spurred further by the energy crisis following Russian invasion of Ukraine.

An intense tactical game is being played out between OPEC+ ― made up of OPEC (Organization of the Petroleum Exporting Countries) and other oil producers including Russia ― which is taking actions to maintain prices through production cuts, and the U.S., which wants oil prices to go down while curbing Russian oil revenues. Oil prices are projected to remain high and unstable for some time to come.

Will the spread of renewable energy reduce geoeconomic risks?

Renewables such as solar, wind, hydro, and geothermal energy also carry risks. That’s because their suitability for a particular area depends on its topography, weather conditions, and other factors.

In addition, with 80 percent of the polysilicon for solar panels said to be produced in China, solar power is not immune to geoeconomic risk. As for wind power, China holds about a 70 percent share in the production of rare earths indispensable for wind turbines.

While efforts to become carbon neutral are urgent tasks for the world to address, it is important to be aware that as long as supply chains go beyond national borders, there will always be geoeconomic risks, even in the case of renewable energy.

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