Page 13 - ISQ July 2022

INVESTMENT STRATEGY QUARTERLY

No Simple Recipe For Energy Security

Pavel Molchanov, Managing Director, Equity Analyst, Equity Research

Among the many geopolitical consequences of Russia’s LOOKING AT THE NUMBERS
war in Ukraine, front-and-centre is the recognition by Let’s first quantify how much of Europe’s energy comes from
Russia. Looking at pre-war numbers, approximately one-third of
European policymakers, businesses, and individuals that Europe’s oil consumption (4.5 out of 13 million barrels per day)
the continent’s long-standing dependence on Russian and also natural gas (15 out of 45 billion cubic feet per day) came
energy is no longer a viable option. Disentangling the from Russia. This is a long-established trading pattern, dating
European economy from Russian oil and natural gas is back to the Cold War era, enabled by pipelines that predominantly
go in an east to west direction. Within Europe, countries which are
vital for a combination of moral, strategic, and economic geographically closer to Russia tend to have higher levels of
reasons. Continuing to pay Russia $20 to $30 billion every dependence on Russian energy. Among the major economies,
month would be tantamount to supporting the Kremlin’s Germany is the most tied to Russian energy; among smaller ones,
war machine. Hungary and Slovakia are highly dependent. When we look at this
same issue from the perspective of Russia’s energy sector, we see
Beyond the moral argument, Russia has demonstrated that it even higher levels of dependence; slightly more than half of
is an unreliable energy supplier, given its willingness to use Russia’s oil exports and three quarters of natural gas exports
energy as a ‘weapon’ against countries it considers hostile. traditionally went into the European market. In other words, both
Finally, the war has raised the price of fossil fuels – around the sides need each other – but, all else being equal, Russia needs
world, but especially in Europe – to such levels that reducing Europe as a customer more than Europe needs Russia as a
their consumption is important for Europe’s economic health. supplier. On a side note: in case you are wondering, Russia
All that being said, the path toward European energy security accounted for only 7% of US oil imports in 2021, and the US has
will be a marathon rather than a sprint. been a net exporter of natural gas since 2017.

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