War in Ukraine: The Future of Energy and A Recession Watch
Updated: Mar 20
While the Russian invasion of Ukraine is escalating the global energy crisis and creating the economic foreground for a global recession, it is also announcing a new round of urgency for decarbonization and cleaner energy.
In reaction to NATO’s support for Ukraine, Russia has been decreasing gas exports to Europe which imports almost 50% of gas from Russia. This has made the region especially vulnerable to energy shortages. The sabotage of Northstream pipelines and the Organization of the Petroleum Exporting Countries’ decision to cut oil supply by two million barrels created an abrupt gas shortage that came with significant costs. In 2022, the EU spent more than $765 billion on subsidizing energy prices. The rise in energy costs has forced NATO countries to seek alternative gas sources. Countries heavily impacted, such as Germany, which contributes 10% of its GDP to funds for gas, are reverting to alternative transportation methods for gas. Clean and easily transportable liquefied natural gas (LNG) fulfills this requirement, which contributes to LNG’s growing popularity among European countries. The growing market demand for LNG builds the foundation for a greener future as LNG is the cleanest of the fossil fuels.
Supply shortage and growing demand for gas increase its prices, which raises global inflation and interest rates that accelerate the recession. Demand for gas rose significantly with the relaxation of COVID-19 regulations. Gas prices reached a high of $320 per Mwh in 2022, a more than 40% increase since Russia invaded Ukraine till the summer of 2022. To overcome the effects of the pandemic and to subsidize energy, countries are forced to increase government spending. Increased spending puts a burden on government debt, which caused the global Debt-to-GDP ratio to reach an unprecedented height of 322% in 2022. Heavy governmental spending creates the foreground for rising inflation. The US witnessed a 7% inflation, a degree comparable to the 1990 recession that experienced high unemployment and slow economic growth. Similar situations are also felt by the UK and EU member states. To combat rising inflation, governments around the world are forced to raise interest rates that come with significant economic costs. These include hampering economic growth and mobility as borrowing becomes more expensive and consumption shrinks. The Economist predicts that stagnant economic growth due to rising inflation and interest rates are the main factors that will contribute to a global recession in 2023. High interest rates also raise national debts and are a threat to financial crises as the costs of borrowing increase.
While the majority of Europe struggles to balance the economy and keep low energy costs, energy exporting countries, such as Norway and Saudi Arabia face immense economic opportunities having lost Russia as a major competitor. Norway ranks 13th in the world for oil production and its gas exports make up 33% of its GDP, almost half of the state’s revenue. In 2022, Norway earned $114 billion solely from gas exports, $88 billion more than in regular years. Saudi Arabia’s oil company Aramco delivered a record net income of more than $87 billion in a half-year period. The energy crisis is also forcing the US to rethink its relationship with Venezuela. Sanctions are lifted for Venezuela in exchange for agreements on fair domestic elections in 2024. The US now authorizes Chevron, a major energy company in the US, to import Venezuelan oil. According to Credit Suisse, Venezuela’s economy is forecasted to grow by 20% in 2023 due to this act.
Furthermore, despite the costs of the energy crisis, opportunities for a greener future have arisen. LNG opens opportunities for safer and cleaner energy, followed by developments in solar and wind energy that are more sustainable and cost-effective. The US government predicts that wind energy will be able to supply 50 states by 2050. Europe’s production of wind and solar energy is witnessing an annual increase of 13% and sets the goal of having at least 32% of renewable energy targets by 2030.
The economic and environmental costs and opportunities triggered by the War in Ukraine portray the integral role natural resources play in shaping geopolitics and the global economy. Despite a rather optimistic future—steady recovery from the effects of COVID-19, alternative energy sources being found, and inflation easing—costs will remain as long as the war continues. There is hope for a greener future in the midst of war and financial instability, but costs remain for both oil producing and reliant countries. Oil-producing countries will have to quickly adapt and find alternative ways to maintain their prosperity and international status. Poor countries rich in fossil fuels will also witness their economy undermining and resources stranding as renewables become cheaper than fossil fuels.