After the Ukraine Invasion: Sobering New Global Energy-Economic-Political Terrain

Russia's invasion of Ukraine, and the West's response, are ushering the world into a new energy, economic, and political era. In broad outline, this new era will have less-globally-integrated energy markets, and less-secure supplies of fossil fuels. Since energy is the irreducible basis of all economic activity, this translates to a precarious global economy and a likely reordering of national alliances. We are, in short, living through a moment that may be as politically and economically transformative as the World Wars of the 20th century, though with little likelihood of an outcome anywhere near as desirable as the boom decades of the 1920s or 1950s.

Energy

We begin with energy, since all else flows from it. The following would seem to be a small news item in comparison with other events and risks detailed further below, but it's emblematic of the new era we're entering.

Major oil companies, including Exxon Mobil, Shell, and BP, have announced that they will cease collaborating with the Russian petroleum industry, which includes state-owned energy giants Lukoil and Gazprom. This will likely have implications more far-reaching and long-lasting than President Biden's ban on imports of Russian oil and gas to the US. Russian oil and gas resources and production are enormous (the country supplies over a tenth of the world's oil and 7 percent of the world's gas), but many of the country's oil and gas fields were initially developed decades ago and are no longer able to maintain former rates of flow. In 2021, the Russian Energy Ministry forecast that the nation was at peak petroleum production levels and would probably never exceed pre-Covid rates of output. For many years, Russian producers have depended on the expertise of giant foreign companies like ExxonMobil to help manage depleting fields and keep production up for as long as possible. Production cooperation agreements required years of negotiation, along with the transfer of key personnel and billions of dollars' worth of infrastructure. With those agreements now in tatters, it is unlikely that Western oil companies will revive them, even if a relatively quick resolution to the Ukraine war ensues. Whether export embargoes continue or not, Russian oil production will begin to decline, and, unless the Russian oil industry quickly obtains investment and expertise from China and India, the declines may happen faster than almost anyone would have predicted.

This comes at a time when global oil production has remained below November 2018 levels for the past 27 months. Demand has been whipsawed by the pandemic, leaving companies wary to start new projects. At the same time, the industry is running out of places to drill. Oil discoveries have been declining for decades; discovery levels for 2021 were the lowest in 75 years.

Earlier this month oil prices spiked to $130 per barrel, with some commentators forecasting prices of $150 or even $200 by midsummer if the war drags on. But now prices are back down below $100 and inflation-wary economists are breathing a sigh of relief. I'm not so sure celebration is warranted. As Rystad Energy's senior oil market analyst Louise Dickson points out, the market has probably not fully factored in the potential impact of reduced Russian production and exports.

If oil prices resume their upward hike, the results could be severe. In the last 75 years, a recession resulted each time oil prices roughly doubled (as happened in 1972, 1979, 1990, 1999, and 2008). While the world uses oil more efficiently now than it did decades ago, it is still overwhelmingly dependent on petroleum for transportation and agriculture. The switch to electric cars is happening far too slowly to make much of a difference over the next couple of years. So, what are the options to maintain affordable oil prices and avert economic mayhem?

In the US, there have been calls to open the taps on domestic oil and gas production in order to ease prices. The assumption that US producers can simply open their spigots is understandable, given the industry's last few years of astounding success at coaxing millions of barrels per day from rock formations that geologists had long ago given up on. And it's true that tight (shale) oil wells can be brought online much more quickly than conventional wells. World conventional oil production had been on a plateau since 2005, a year that saw the height of "peak oil" awareness as measured by Google searches. Since then, salvation has come from unconventional oil, a category that includes Canada's oil sands and US tight oil (sometimes called "shale oil") produced by horizontal drilling and hydrofracturing. Between 2006 and 2019, the United States went from pumping about 5 million barrels of oil per day to over 12 million barrels--a rate of growth never before seen anywhere in the world. But now, after more than a dozen years, shale's shine is fading. Fracking producers have cut back on drilling because they got hammered by lower prices during the pandemic while having no discipline about curtailing production. Now investors are much more circumspect and demand returns on their investments, which they are now seeing due to high prices. But that isn't the full story. Most production and profit have come from small sweet spots within the larger geological formations that drillers have targeted. And those sweet spots have been drilled so full of vertical holes and lateral extensions that there's hardly room for more. As Earth scientist David Hughes has documented in a series of detailed studies, only the Permian Basin in Texas still has growth potential. The Bakken region in North Dakota, an enormous source of petro-optimism just years ago, is already in terminal decline, as are most other tight oil plays. US production may increase slowly and only somewhat from its current levels, but only for a couple of years or so until the effects of depletion elsewhere overcome rising production in the Permian.

The US Strategic Petroleum Reserve holds only about a week's worth of world oil supply. Of course, there is zero likelihood that it would be emptied in such a short timeframe. This reserve is meant to help the nation and the world get through just a few weeks of supply difficulties. If drawn down by a couple of million barrels per day, it would be exhausted in a year.

There is talk of the US helping Venezuela increase its oil production as a way of offsetting any global loss of Russian crude. Venezuela boasts enormous reserves of extra-heavy oil. However, terrible relations with the US during the Chavez-Maduro years and poor management of the state-owned oil company PDVSA led to sharply declining production. Last week Washington sent a high-level delegation to Caracas, and President Maduro freed two American prisoners (one of them an oil executive). But Venezuela's oil, however plentiful, will be slow and expensive to access. Further, as with Canada's oil sands, there will be an enormous environmental price to pay. Adding to the complexity is the fact that Venezuela and Russia have been cozying up in recent years. Venezuela's oil ministry now says that the country might be able to hike production by 400,000 barrels per day, without offering a timeframe, if granted the licensed exemption from US sanctions. Or is this just an empty promise designed to help end the sanctions?

What about OPEC? Reportedly, the Saudis wouldn't even answer the phone when President Biden called to ask their country to supply more oil to world markets. Most of the Middle East's oilfields are half-depleted, so raising production by much now would damage reservoirs, reducing future capacity.

The world is feeling a hint of oil shortage where it hurts most: global diesel fuel supplies are at the lowest level since 2008. Diesel is essential to trucks, which move raw materials and finished products of all kinds. Without diesel, the machinery of civilization would seize up within days. Some US truck stops are already rationing fuel to customers.

Many environmentalists are promoting the notion that electric vehicles and solar panels can rescue the world from dependence on Russian oil and gas. But a renewables build-out would be glacial in pace, requiring massive new infrastructure. After the past 20 years of dramatic expansion in wind and solar, these two sources together currently supply the world with just 3.3 percent of its energy. And there are doubts about the sufficiency of raw materials for building panels, turbines, and batteries at a vast scale. As I have written elsewhere, the real energy transition will almost certainly not be a complete and seamless migration from fossil fuels to solar and wind, but rather a shift from using a lot of energy to using a lot less.

The build-out of nuclear power shares one challenge with renewables--i.e., the need for massive electrification of industry and transportation. But to this it adds higher construction costs, the problem of uranium depletion, and added environmental and political risks (as we are seeing now with the Russian takeover of Ukrainian nuclear power stations).

Coal is not immune to contagion from the rising prices of oil and gas. Last week, spot coal prices in China reached nearly double the government-set price cap. While there were domestic reasons for the price spike, there is also an international dimension: with natural gas potentially in short supply because of the Ukraine war, prices for shipments of coal are wafting skyward. At the same time, many of China's coalmines are getting more expensive to operate due to depletion.

In short, the world is now grasping at straws in its efforts to maintain affordable energy flows. We are probably near the inflection point that analysts who track resource depletion have long warned about. Regardless of the strategy chosen, total energy usage will likely be unable to grow much, and may start to decline from here on. Rising energy prices will periodically destroy demand by shrinking the economy, thus lowering demand (and prices) temporarily until economies can partially recover; then prices will be bid upward once more. The cycle may continue to repeat itself, each time at a lower level of economic activity and energy usage--though there is an outside chance that we will see a huge blowout of the financial system that lowers demand dramatically, once-and-for-all. The only sensible way forward would be to cooperatively manage production and consumption through rationing in order to reduce shocks and adapt to new and continuously shifting economic conditions.

Economy

There is a lot to discuss in this section, so please forgive a bit of rambling.

Capitalism is, by its very nature, a form of low-level economic warfare: competition is the norm within and between capitalist societies--tempered by high degrees of cooperation within corporations and nations.

Rising energy prices are inherently inflationary, since energy is needed for all economic activity. Inflation in the US is running at nearly 8 percent--the highest in 40 years--which has perilous political ramifications for the party in power. But, at the same time, the world has engineered an enormous debt bubble, which carries the potential for large-scale deflation. In an ideal world, inflationary and deflationary trends would balance each other out. But our real world is far from ideal. Ahead we face both turbulence and contraction.

Economic contraction is, of course, the one outcome that world leaders wish to avoid at all cost (though, at long last, the IPCC is starting to discuss degrowth in a possible climate scenario). In the absence of a shared recognition that the end of growth is inevitable, nations and alliances of nations will probably try to expand their own economies at the expense of other nations and groups. This means more geopolitical tension and instability.

Capitalism is, by its very nature, a form of low-level economic warfare: competition is the norm within and between capitalist societies--tempered by high degrees of cooperation within corporations and nations. Geopolitical alliances are nearly always based on shared economic interests, and armed conflicts are often preceded by trade disputes.

Historically, sanctions have been at least partly successful about one-third of the time they have been used, according to Nicholas Mulder in an interview with The Atlantic's Annie Lowrey. Rarely have they been deployed as sweepingly; but, even in the most extreme cases, as with North Korea, the consequences can sometimes be endured by the sanctioned country for years or even decades. Mulder makes the point that clarity in the purposes and goals of sanctions is essential to success. The only articulated goal in the current instance is for Russia to withdraw from Ukraine, but that outcome seems extremely unlikely in the short term.

Nevertheless, there are already signs the sanctions are having an impact on popular feeling in Russia, and on the opinions that matter the most--those of the oligarchs who keep Vladimir Putin in power. Erica Frantz, an expert on dictators at Michigan State University, recently told journalist Max Fisher, "The indicators of elite discontent that we have seen thus far are unusual in Putin's Russia and should therefore be taken seriously." So far, the invasion is not going well from Moscow's perspective. Russian forces are bogged down and making little headway against stiff Ukrainian resistance. A long war would certainly not be to Putin's domestic political advantage, nor would it aid his country's international standing or economic prospects. But retreat would, just as certainly, lead to Putin's downfall.

The UN Food and Agriculture Organization (FAO) food price index rose last month to its highest level ever. Wheat prices are up partly because both Ukraine and Russia are major wheat exporters. A global supply gap "could push up international food and feed prices by 8% to 22% above their already elevated levels," according to an FAO representative. Ukraine and Russia together export more than a third of the world's grain products, and Russia is also a key exporter of fertilizers (made from natural gas), with much of Europe and Central Asia depending on the latter.

High grain prices have long been associated with political instability. The Ukraine war could thereby help destabilize parts of the Middle East and Central Asia. Over the longer term, Europe, South Asia, and Africa might be vulnerable.

Western nations will feel various forms of blowback from their economic warfare, likely including delays along the global supply chain. Such problems will be far worse if China comes to Russia's aid (see below). The world has spent decades building complex supply chains. I doubt if these will be quickly replaced or restructured; and, relying as they do on localized sources of minerals, expertise, and cheap labor, some may not be repairable.

The one sure winner in the Ukraine invasion, as in all wars, is the armaments industry. It's too bad we can't eat tanks and shells, the manufacture of which will be soaking up more and more of the world's wealth.

Politics, Geopolitics, and Governance

After the Ukraine crisis, the world will likely be more polarized. As the US continues its decline as a global hegemon, it may more aggressively seek to maintain zones of influence--even as it continues to digest the fact that recent wars in Vietnam, Afghanistan, and Iraq proved disastrous.

The current crisis may harm China, because it derives most of its economic power from liberalization of trade. So far, the Chinese are avoiding criticizing Russia, but are also withholding military aid. Unsurprisingly, Chinese leaders are looking out for their own interests.

Russia and China have for years been trying to end US economic dominance by forging trade partnerships in a way that circumvents the global supremacy of the US dollar. Washington has perceived this as a serious long-term threat (which it is!). Now, with the West's open economic hostility against Russia, China could lose an important ally. A great deal depends on its response. If China were to come to Russia's aid militarily, the prospect for global war would increase significantly. So far, Chinese President Xi does not appear willing to risk everything because of Putin's folly. More likely, China will "help" Russia by replacing Western oil and gas giants in managing Russian energy industries, and doing roughly the same with Russian mineral producers (global nickel prices spiked after the invasion).

Without Chinese aid, it's unclear how long Russia's economy can teeter without severe domestic political consequences. Tens of thousands of Russians, many of them intellectuals and journalists, have fled to Istanbul. This exodus somewhat eases the domestic political pressure on Putin. And, as independent media are shut down, Russians become more detached from global information flows. But totalitarian perception management has a way of backfiring eventually. There is talk of a palace coup in Moscow, but it's unclear if this talk is just Western disinformation. If Putin were indeed toppled, a leadership vacuum might result, which could lead to even more geopolitical risk and uncertainty.

Sadly and ironically, all of this geopolitical destabilization is happening as democracy in the US is faltering, and as the nation faces a possible right-wing takeover. The Trump years showed just how fragile US political institutions can be when confronted by authoritarian populism. While Trump himself is unlikely to be elected to another term, his party is busy cementing minority rule in place in half the nation's states, and perhaps in Washington as well.

Europe is experiencing a pivot just as drastic, though complicated by national borders. Germany, the continent's economic powerhouse, is rethinking its long-planned energy transition after halting Nord Stream 2, the new gas pipeline from Russia that would have provided Europe with fifty-five billion cubic meters of gas per year. Berlin is quickly rethinking its plans to ditch coal, even though that means reneging on climate goals. There are also hasty plans to build LNG import terminals to replace the gas Germany has been guying from Russia--as a source both of electricity and fertilizer. The terminals will take two years to build, and the LNG, much of it coming from the US, will cost much more than piped Russian gas. Berlin is also reversing its policy of maintaining only a vestigial military force. If the country follows through on plans just announced, it could become the world's third largest military spender, after the US and China.

The political shifts following from the Ukraine invasion come at a time when skillfully produced disinformation has become a serious challenge to democracies worldwide. In particular, Russian propaganda has increasingly infected both far right and anti-imperialist left news outlets in North America and Europe. But Russia is far from being the only source of fake news, and tools of disinformation are quickly becoming cheaper and more effective. Indeed, the manipulation of perception and opinion is reaching the point where it will soon become extremely difficult if not impossible to tell who did what when, and therefore who's right and who's wrong in any given instance. Whoever controls artificial intelligence (AI) will effectively control perceived reality.

At a social gathering in Berkeley, California, a few days ago I chanced to meet an AI researcher who demonstrated on his computer things I thought would not be possible for another decade or two, if ever. With a minute's worth of keystrokes he was able to produce entirely new text and images, made to order. The result could be a piece of visual artwork, an essay, a news story, or a faked photograph. This technology could put millions of information workers and visual artists out of work. And if this is what's possible in a living room in Berkeley with a laptop, imagine what can be done in Langley or Moscow with a supercomputer. It's safe to assume that reality is already being simulated in ways to which most of us currently give little thought. When it is no longer possible to tell truth from simulation, democracy becomes nearly untenable.

Climate and Environment

It seems perverse to treat the subject of climate change as a tag-on item in this overview of recent events, unmentioned in the essay's title. But, after all, that's reflective of the priority that climate is getting from policy makers and journalists these days.

Any loss of global trust and cooperation hobbles progress toward peacefully reducing human overshoot on planet Earth. We appear to be nearing a historical moment of "let's choose sides and fight" as opposed to "let's sit down together and figure out what to do." As I've written elsewhere, our best hope to avert climate catastrophe is a cooperative agreement to cap and ration fossil fuel production and consumption. Absent that, our future is most likely a mad scramble for what's left.

If I'm right in saying that the Ukraine invasion likely signals the end of global energy growth, then any decline in fossil fuel production would be accompanied by a corresponding decline in carbon emissions (disregarding, for a moment, possible tipping points associated with melting permafrost or methane hydrates). Perhaps that's a good thing. Meanwhile the people of Ukraine suffer; and world leaders, transfixed by geopolitics, seem even further away from collective recognition of what will be required to avert societal collapse.