The new geopolitics of energy

The Russian “relationship” with Ukraine can be viewed through many prisms. Russia has annexed a large chunk of its territory (the Crimea) in 2014 and is currently attempting to annex more (Donetsk and Luhansk). The rationale has included harking back to medieval history, with references to millennia-long cultural and ethnic ties.

Russia’s willingness to risk a large-scale “special military operation” is buttressed by calculations based on energy geopolitics. Changes in Western Europe’s energy mix were triggered by a natural disaster in Japan, 11 years ago, and that gave Russia increased leverage versus the European Union (EU) and the North Atlantic Treaty Organization (Nato).

In 2010, Germany had 17 nuclear power plants. Over 22 per cent of its electricity was nuclear. In 2011, a tsunami led to catastrophic flooding at the Fukushima nuclear plant, with loss of life, and the setting up of a high-radiation exclusion zone.

As a direct result, Germany decided to mothball its nuclear plants. Several other European nations also opted out of nuclear power. France is the only major European nation that did not pullback noticeably on nuclear plans, post-Fukushima. Circa 2022, just three German nuclear plants are functional. Roughly 10 per cent of Germany’s power comes from them. German policymakers may move back to coal and mothball those three by end-2022.

Germany’s power needs have, of course, grown in the last decade and, while much of the current electricity mix (almost 45 per cent) consists of renewables, nuclear power has been largely replaced by natural gas. Russia supplies half of Germany’s gas. Russia is also a major or primary gas supplier to other European nations, mainly to Bulgaria, France, Italy, Poland, Finland, Latvia, and the sole supplier to several smaller Balkan nations.

Given its energy leverage over the EU and Nato, it has a much freer hand in Ukraine. Even after the 2022 invasion, Western Europe’s gas dependencies make the EU reluctant to cut key cash-flows to Russia. Russia’s estimated daily costs of waging war may be lower than its daily gas revenues from Europe.

Gas transportation by ship or pipeline is a huge logistical challenge. The expense of transportation and liquefaction/ regasification increases with distance. As of now, Europeans are paying around seven times as much as Americans for natural gas. Finding alternative sources could push up prices more. Until and unless Europe finds cost-effective ways to rework its energy mix, it is hobbled in action versus Russia.

Energy geopolitics have often been at the root of major conflicts. Arguably, Japan attacked Pearl Harbor, the headquarters of the US Pacific Fleet, in December 1941 because America cut off oil sales to Japan in July 1941. Japan needed to annex Indonesia (a Dutch colony) and Malaysia (British) for alternative supplies of oil and gas. That meant it had to capture the Philippines (an American colony) as a staging point, and so, Japan had to knock out the Pacific fleet.

When it comes to oil and gas, there are a multitude of exporters scattered around. Every energy importer can work out equations with some exporter or another. For example, Israel doesn’t get on with its oil-exporting neighbours. So it imports from Mexico, Norway, Colombia, Venezuela. Europe might look at Azerbaijan and Qatar, for alternative gas sources. It may even think of rapprochement with Iran.

When it comes to renewables, there’s only one behemoth in the supply chain. China makes 80 per cent of the world’s solar panels; it has a big presence in wind turbines, it’s a huge player in storage batteries; and above all, it has monopoly status in rare earth production.

It is conceivable that nations that don’t get on with China will build their own supply chains in solar and wind equipment and in storage, even if it costs more than Chinese imports. But rare earths are a different matter — there are few other sources for these 17 essential elements.

Emission-reduction is an urgent priority, given accelerating climate change. But the geopolitics of being dependent on one supplier could be nightmarish. Especially if you happen to have border disputes with the supplier in question.