High energy prices will hurt companies and consumers in 2023

THE AFTERMATH of Russia’s invasion of Ukraine has been a long tunnel for energy users—with no light in sight. Western sanctions and supply cuts from Russia have put pressure on the global oil-and-gas trading system, which was already strained by a sharp rebound in demand after the pandemic and by years of low investment in new production. In theory 2023 could look a little better. Russia is finding alternative buyers for the oil and gas the West no longer wants. Europe appears to have stored enough gas to survive this winter; by next winter it should also have more terminals to receive liquefied natural gas (LNG), making it less dependent on Russia’s piped fuel. Yet it is all too likely that energy markets will flare up again. Three risks stand out.

Economic slowdowns will smother oil demand, but disruptions to supply may well keep the petroleum market off balance—the first danger. Once Europe implements its boycott of Russia’s seaborne crude oil, in December, China and India will buy even more than they have in 2022, helping to keep Russia’s barrels in the market. As Europe’s vast imports are re-routed to Asia, new bottlenecks are bound to appear. America may become more hesitant to tap its Strategic Petroleum Reserve, which is significantly depleted after being raided for months since the invasion. Some exporters, such as Libya, look unlikely to produce at full capacity for very much longer; OPEC countries are already failing to meet output targets. The cartel could also announce yet more big cuts in an effort to keep prices up.

The second concern is the growing scarcity of refined oil products, such as petrol (gasoline) and diesel. In February 2023 Europe is set to ban imports of such fuels from Russia, most of which, this time, will not be redirected elsewhere. China and India, which have ample refinery capacity, are not interested, and other would-be buyers are too far away. Europe, for its part, is struggling to produce decent quantities of these products, because expensive natural gas means it cannot produce a lot of hydrogen, a crucial input in the making of diesel. In principle China could export more oil products, allowing it to flog the Russian oil it will soon be refining in huge amounts. China’s own stash may be depleted if the winter is cold, prompting it to restrict exports. A global diesel crunch may, therefore, strike before March 2023.

Perhaps the wildest card is gas. As Russia struggles to make gains in Ukraine, it will intensify its manoeuvres to stoke inflation in Europe and keep the continent in the dark. Nobody expects it to reopen flows through Nord Stream, its main pipeline to Europe, which is anyway badly damaged after being sabotaged in September. But it could cut supplies through other pipelines that are still delivering gas to Europe, such as the one that runs through Ukraine, and stop delivering LNG to Europe. Meanwhile, the EU could strengthen measures aimed at capping the cost of Russian hydrocarbons and otherwise make it more difficult for other countries to buy from its foe.

The next few months will test the West’s resolve. But don’t expect much of a truce in its energy wars with Russia once the winter is over.■