Shocked: Jason Bordoff on What the Ukraine Crisis Means for Energy Markets
“This conflict has the potential, I think, to be the worst energy crisis ever, even bigger than the one in the 1970s.”
MONEY
Although the severe Western sanctions imposed on Russia since the start of its war in Ukraine include an explicit carve-out for energy sales, the crisis has already sent oil and gas prices through the roof (though they edged back down again recently, possibly due to China’s growing COVID wave). Before the war began, Russia was the world’s third-largest oil producer, and supplied a huge share of Europe’s natural gas. What will the ongoing bloodshed mean for those supplies, as well as prices worldwide? How will they affect the slow-moving transition to clean energy? And what about nuclear power, which more and more countries have shunned since Japan’s Fukushima disaster in 2011? To get the answers to all these questions and more, I called up Jason Bordoff, who was a senior adviser to President Barack Obama on energy and climate change. He’s now based at Columbia University, where he’s the co-founding dean of the Climate School, the founding director of the Center on Global Energy Policy, and a professor of international relations. We spoke last Thursday.
Octavian Report: How much pain do you think Western sanctions are causing Russia, given that they allow Russia to continue selling its oil and gas?
Jason Bordoff: Western nations have chosen not to sanction Russian energy sales, apart from some small, mostly symbolic steps like Washington banning Russian exports to the United States. This is unlike what happened with Iran; in that case, Western sanctions tried to cut off Iranian oil exports entirely. The explanation for the difference is that while cutting off Russian exports would impose economic pain on Russia, it would also impose a lot of economic pain on us, too, because the world is dependent on Russian oil and Europe is particularly dependent on Russian natural gas. In fact, Russian gas sales to Europe have gone up since the conflict started.
That said, the financial and banking sanctions, plus the general stigma around doing business with Russia, have already caused a meaningful amount of Russian oil to be pulled off the market. Concerns about insurance for tankers and whether banks can process transactions, plus the fears of really bad PR, have caused a lot of buyers to steer clear of Russia. As a result, the International Energy Agency projects that by April, three million barrels a day of Russian oil will be disrupted. That’s out of a total of eight million barrels a day before the crisis. There are very few alternative sources of oil supply today that could replace that amount, which is why prices went up a few weeks ago before coming back down slightly.
OR: Explain why these moves against Russia have affected prices in the United States, which never bought much Russian energy to begin with.
Bordoff: Thanks to the shale revolution, the United States has become a net exporter of oil. But oil prices are set on a global market, so there’s a global price for oil. That’s the price that U.S. gasoline refiners pay. As a result, the global price of oil determines what U.S. gasoline stations charge consumers. It doesn’t matter how much oil the United States does or doesn’t import. If there’s a problem halfway around the world, in the Middle East or Russia or anywhere else, U.S. consumers are going to feel it at the pump.
OR: Would opening up the Keystone XL pipeline or doing additional drilling in the United States make a difference?
Bordoff: As I said, the IEA estimates that in the months to come, we’ll lose somewhere around 3 million barrels a day of Russian supply. In order to keep oil prices from surging, that missing supply will need to be offset somewhere else. OPEC could put more barrels on the market. We have strategic oil stocks that we could release. And U.S. shale production is going to grow sharply, not because of anything the government does but because higher prices always lead to more production. Shale in particular responds quickly to price changes.
At current oil prices, U.S. oil production will grow more than a million barrels per day over the next year. That’s a big number. And with Russia undertaking the worst military aggression in Europe since World War II, it’s better for oil and gas to be produced in the United States than in Russia.
OR: Describe the practical difficulties in cutting off Russian gas sales to Europe.
Bordoff: People often refer to oil and gas as one thing, but they’re very different. One can think about the global oil market as a sort of giant bathtub. Oil is largely fungible, and supplies can move around. If the United States says, “We’re not going to import any more Russian crude,” that Russian crude will simply go somewhere else.
Natural gas doesn’t work that way; it’s much less of a global market, though that’s starting to change. At present, a lot of natural gas is traded locally and regionally, because it’s harder to move around the world. Oil can be put on a tanker and a tanker can be redirected to Asia instead of Europe relatively easily, at a little bit of extra cost. Natural gas mostly moves by pipeline. So shifting gas supplies around is harder.
Europe currently gets about 40 percent of its natural gas from Russia. That gas is used for electricity. It’s used for heat in the winter. It’s used for heavy industry like steel and cement. So it would be very hard for Europe to do without Russian gas; it would be incredibly painful, economically. You’d be talking about government rationing of energy, industries shutting down, incredibly high energy prices, and a struggle to heat homes.
OR: What kind of changes would Europe need to make in order to wean itself off Russian gas?
Bordoff: There are many things it could do but also a lack of good short-term options. Europeans could start turning down their thermostats and putting on a sweater. They could start burning more coal, which I think we are going to see both in Europe and Asia this winter. As for longer-term fixes, Germany has already made one of the most significant changes in energy policy of any country in the span of a week: it said it would cancel the controversial Nord Stream 2 pipeline and spend billions of dollars to build new infrastructure to import liquified natural gas.
In the longer term, Europe also needs to do things like switch to electric heat pumps for homes, and it needs to build more solar and wind generators. It should also build out its electric vehicle networks. But those changes won’t happen by next winter or the one after.
OR: The West first imposed sanctions on Russia following its initial invasion of Ukraine in 2014. In the years since, a lot of people have called on Europeans to do more to reduce their reliance on Russian oil and gas. Why didn’t they do it before now?
Bordoff: I think there were mixed views in Europe about the wisdom of relying on Russian natural gas. For the last half-century, Russia has been a mostly reliable supplier. Even in this current crisis, it hasn’t cut off sales to Europe. So some Europeans said we shouldn’t worry about it, that it’s in Russia’s interest to keep selling us its gas.
It’s also much cheaper for Europe to get its gas from Russia than from somewhere else. Importing liquified natural gas is more expensive than importing pipeline gas. The combination of cost and a general sense of complacency led to a lack of urgency in Europe.
OR: Do you think high energy prices are here to stay?
Bordoff: I do think higher energy prices will be here for a while, and not just because of the Ukraine crisis. We should remember that Europe was already experiencing an energy crisis before Russia invaded Ukraine. Energy prices were incredibly high. Governments were giving consumers subsidies to pay their energy bills. Some utilities went bankrupt. Some energy-intensive heavy industry companies shut down. Oil prices were poised to continue rising.
That was all due to a number of factors. The problem, most generally, was that we have been under-investing in energy. Over the last decade, the economic performance of the oil and gas industry was terrible, so people lost money. That created doubts about investing more in the industry. So did social pressure to stop investing in fossil fuels, plus uncertainty about the long-term outlook for oil demand due to climate promises. As a result, we reduced investment in oil and gas.
At the same time, we didn’t invest enough in clean energy to replace it. Last year, the world invested as much in oil and gas fields and infrastructure as the International Energy Agency says we should be spending if we were on track for net zero emissions by 2050. The problem is we’re nowhere close to being on track for that. Oil use is going up. Gas use is going up. And now coal use is going up, because we’re not taking those targets seriously. If we were on track to meet our climate goals, we’d be investing three or four times as much in clean energy as we are today. But we’re not, and as a result, there were price spikes and market crunches even before Russia caused this new shock to the system.
OR: Will the crisis cause European and American governments to invest more in the transition to clean energy?
Bordoff: We’re still less than a month into the Ukraine war, so it’s hard to say with certainty, but I think we’re starting to see a recognition in the United States and Europe that we need to walk and chew gum at the same time. By that I mean that we need to take near-term steps to make sure we can continue to keep our lights on and heat homes. Those steps are going to include some more investment in hydrocarbon infrastructure, such as import capabilities for liquified natural gas in Europe.
At the same time, we’re starting to see policymakers rightfully say that the crisis in Ukraine is a reminder that it does not matter how much oil and gas you produce: you’ll still be vulnerable to shocks in a global market when there’s a problem in a supplier as big as Russia. So the most important thing we can do to make ourselves more energy secure and to deal with climate change at the same time is to reduce how much oil and gas we use and to find ways to use alternatives like renewable energy that are less susceptible to geopolitical volatility. Those changes can’t happen as quickly, but I do think you are going to see a significant increase in the push for clean energy from policymakers. There may even be more support for nuclear power too—even in Europe.
OR: Let’s talk about that. On the one hand, by underscoring the vulnerability of conventional energy supplies, the Ukraine crisis has highlighted the need for more nuclear power. On the other hand, the fact that Russia has already attacked two Ukrainian nuclear plants in the course of the war could make governments and the public even more nervous about nuclear power. Which do you think it will be?
Bordoff: Nuclear power is not without risk, but it has a good safety record, and we need all zero-carbon tools at our disposal. Renewables alone won’t get us where we need to go. The recognition of those facts, plus concern about the reliability of Russian oil and gas exports, is increasing governments’ awareness of the fact that we need, at a minimum, to stop retiring existing nuclear plants. And some countries in Europe are thinking about building new ones.
I am worried about potential worst-case scenarios, such as intentional or unintentional damage being done to the infrastructure used to maintain the safety of a nuclear power plant in Ukraine. If this conflict led to a nuclear accident, it would, I think, meaningfully change how people think about nuclear power, the same way Fukushima did a decade ago. So we’ll see. I know policymakers will work very hard to make sure that doesn’t happen, but it is a real risk. There were reports a week or so ago that the electricity for Chernobyl might be cut off, and that electricity is necessary to keep the plant from melting down.
OR: How long would it take to get new renewable and nuclear energy onto the market?
Bordoff: It varies depending on which kind of clean energy you’re talking about. Electric cars take time because, on average, people only buy new cars every 12 years or so. So even if the percentage of new electric cars sold went from a few percent today to something much higher, it would still take time for the vehicle fleet to turn over. With renewables like solar and wind, meanwhile, there are constraints on how quickly supply chains can scale up and get you the materials you need to build them. And the more quickly you do that, the more cost inflation you’d see.
One of the biggest barriers to scaling renewables, however, has nothing to do with technology; it’s permitting and regulation. In Western nations, it can take 10 years to get the permits to build a long-distance transmission line if it crosses a national forest somewhere or passes through communities that might oppose having renewable infrastructure built in their backyards. I think this is one of the biggest challenges we face in the clean energy transition. Because we need to build a lot if we want to make the change. We need to put a lot of steel on the ground. And right now that’s exceptionally hard. Changing that would require massive coordination among local, state, and federal stakeholders, and I’m skeptical that that’s going to happen anytime soon.
OR: Will the Ukraine crisis affect the supply chains of materials necessary for building clean energy?
Bordoff: I don’t think it will have a huge effect, at least not right away, but commodity prices across the board are surging. In addition to oil and gas and coal, Russia is also a major supplier of the fuel that nuclear power plants use. About 20 percent of the enriched uranium used in U.S. nuclear power plants comes from Russia. That fuel is bought years in advance, but over time, it could become a real issue.
OR: Doesn’t Ukraine have big uranium deposits too?
Bordoff: Yes it does. That’s part of the reason why this conflict has the potential, I think, to be the worst energy crisis ever, even bigger than the one in the 1970s. That crisis was about oil coming from a group of countries that were not that geopolitically significant. This time, the crisis involves a country that has massive military power and nuclear weapons and is a major supplier of oil, gas, coal, nuclear fuel, and lots of other commodities. Russia is also a large producer of critical minerals that are needed for clean energy.
OR: Do you see this crisis having a net positive or negative impact on emissions?
Bordoff: In the near term, it may make them worse, because we’ll see more coal use in Europe and Asia. In the long term, however, it could accelerate the transition away from hydrocarbons because it has reminded us that making that change is not only important for the climate but also for our national security. So it depends what timeframe you’re talking about.
OR: What are the implications of this energy crisis for the developing world?
Bordoff: It will have ripple effects. Some emerging market countries have begun importing liquified natural gas. Now the price of LNG is skyrocketing, which will put an extra economic burden on them. And those prices will keep rising, because if Europe loses some amount of Russian natural gas, it will need to import more LNG, and that gas has to come from somewhere.
In response to rising gas prices, some Asian countries, especially China, will find it more economical to burn coal. That will cause coal prices to go up, and they’re already at near-record levels. That, in turn, will hurt the many low-income and emerging-market countries that depend on coal for cheap energy. Countries like Pakistan already struggle to keep their electricity grids running 24/7. Now they might soon be unable to afford to import the fuel they need to keep the lights on.
OR: You served in the White House. Let’s say you had 15 minutes to advise the president on what big-picture moves the United States should make on the energy side to deal with the Ukraine crisis. What would you tell him?
Bordoff: I would say that we need to make sure that our energy and climate policy is dually focused on ensuring secure, affordable, reliable supplies of energy today and on accelerating the transition to clean energy, which will reduce our need for inevitably volatile hydrocarbons exposed to geopolitical risk. This may even create an opportunity for industry and environmentalists to find common purpose—though that may be too optimistic, given the way things work in Washington today.
This interview has been edited for length and clarity.