With the escalation of the Russia-Ukraine crisis into a war, ANBOUND analysts have predicted that the global energy market and industry would undergo a significant reset. This refers to the significant changes in global energy production, trade, transportation, consumption, investment, and financial markets as a result of the geopolitical conflict involving Russia and Ukraine. Such system adjustment will change the long-established global energy field, while its pattern and trend will bring about the systematic reconstruction of the global energy industry and market.
In this crisis, Europe and the United States wish to ditch their energy dependence on Russia but found it difficult to achieve in the short term. For Russia, its energy output is a “weapon”; if Europe and the United States cannot do without it, Russia can use it against them. Europe’s move to cut its dependence on Russian energy is a complicated matter. For a long time, Russian energy has become an indispensable part of the European economic system. However, driven by geopolitics, European nations are refusing to be restricted by Russia’s energy, which is another type of “politics”. In the medium and long term, Europe must do away with its energy dependence on Russia. This process that begins now signifies European countries will remove Russia’s energy from the economic system. This by any means would be a long and arduous process that will demand a system reset in the energy industry.
The energy reset process has already unfolded. A few days ago, German President Frank-Walter Steinmeier publicly admitted that he made serious mistakes on the energy front. He said that after 2014, Germany should have listened to the warnings of its Eastern European partners and halted the Nord Stream 2 energy pipeline in time. Nord Stream 2 was a strategic mistake and because of that, Germany’s reputation in Eastern Europe is at stake. Most important of all, in addition to correcting former Chancellor Angela Merkel’s political legacy, the German President’s acknowledgement of error demonstrates Germany’s commitment to reducing its reliance on Russian energy.
The energy reset will be highlighted in two aspects in terms of sourcing energy resources: For a starter, European countries seek new sources of oil and natural gas from different parts of the world. The Middle East, Canada, the United States, and Australia are all possible alternative sources. This means that there will be a major supply and demand adjustment in the global energy market. This shift, however, would be difficult for European nations to make to satisfy their short-term needs.
Then, there is the change in the composition of energy consumption, i.e., the reduction in the demand for fossil energy such as oil and gas and the switch to other forms of energy. A current evident indication is that the pace of the transition to renewable new energy in many nations has not slowed as a result of the impact of the Russia-Ukraine war, but has instead accelerated. Many nations have begun to examine the geopolitical significance of energy transformation.
An outcome worthy of attention is that, in the process of the shift in the composition of energy consumption, many countries have re-emphasized the importance of nuclear energy and strengthened its development. Germany and Belgium have indicated their desire to prolong the time limit for withdrawing from nuclear energy, while several nations have proposed the need to enhance nuclear energy development. The United Kingdom recently said that in order to improve the country’s energy independence and cope with increasingly high energy prices, it has launched the latest energy strategy with nuclear power at its core, and plans to approve up to 8 new nuclear reactors in existing nuclear facilities at a rate of one per year, until 2030. Previously, the UK government approved nuclear energy at a rate of one every 10 years. The UK’s energy self-sufficiency rate is not low. Its natural gas and oil imported from Russia account for 5% and 8% of local demand respectively. To reduce its reliance on Russian energy, it has opted to accelerate the development of nuclear energy. The new energy strategy aims to change the energy landscape by 2030, when 95% of power will originate from low-carbon sources.
It is difficult to determine if the choice to increase nuclear energy during the energy reset process is a step forward or a step back for humankind. From a technical point of view, the use of nuclear energy is of course progress; but from the perspective of environmental protection and nuclear safety, this means reverting to an energy source that should have been scrapped in the first place. The accident at the Chernobyl nuclear power plant and the one at Fukushima are painful lessons for humanity’s nuclear energy quest. While human society has chosen to reduce or eliminate nuclear energy based on the ecological and environmental protection and moral high ground, the impact of the Russia-Ukraine war has led many countries to return to reality and expand nuclear energy development, and take a very practical approach to alleviate the energy supply problem. It also means that people have given up on the ideas they held to in the past. In a way, this is a step backwards for human society.
Final analysis conclusion:
A global energy reset is now underway as a result of the impact of geopolitical shock. This is a systematic adjustment involving global energy production, transportation, consumption, trading, environment, politics and other factors. China is one of the largest energy consumers in the world and is highly dependent on international oil and gas resources. Hence, it will be significantly affected by the global energy reset. Considering the angle of energy security, to better adapt to the energy rearrangement in this tumultuous world, China needs to perform an in-depth study on the adjustment of the global energy pattern, as well as make strategic research and policy preparations in advance.
Writer by He Jun
Partner, Director of China Macro-Economic Research Team and Senior Researcher. His research field covers China’s macro-economy, energy industry and public policy.
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