War and the Throttling of Energy

After years of consistent hostility and tension on the Russia-Ukraine border, the eyes of the world have returned their gaze upon this conflict as tensions have flared up into a full-on conventional kinetic war, the largest such event in Europe since the Second World War. Setting aside the West’s overtly aggressive handling of Russia in recent decades, in a number of key areas, Russia and the West had been taking some political and economic steps toward cooperation. One of these steps was the completion of the Nord Stream 2 pipeline. It could have been one piece of stitching for holding together the tenuous relationship between Russia and the West that has now taken many steps back.

The invasion has eclipsed those years of relatively low-level political turmoil since the commencement of the Donbas War in 2014 and has hailed a major shift in larger macro trends in areas of human mobility, security and cooperation, finance, and commodity markets as U.S. aligned countries and corresponding multinationals have piled in on sanctions against Russia. As far as commodities, these include critical resources such as grain and agriculture, metals and minerals, and of particular note, energy as Russia has played an immense role in providing oil and natural gas to neighboring regional countries and beyond. Now, the flow of energy resources from east to west is hanging in the balance as new policies that throttle that energy flow have quickly taken effect.

The response from Germany may be seen as a setback in the larger scope of European security. Until now, leaders in Germany have downplayed the natural gas card flashing red on the table. If it were up to Germany, that card would be tucked away out of sight altogether and not on the table at all as natural gas from Russia has played an immense role in power and heating for decades, especially in the winter.

In September of 2021, construction of the Nord Stream 2 gas pipeline linking Germany directly to Russia for delivery of natural gas supplies was completed and it was expected that after routine certifications on the German and European Union side, natural gas would start flowing, the cost of energy in Germany and thus the rest of Europe would sink, and the historically hostile countries would enjoy a mutually beneficial relationship in economic energy regimes. At the time, even the White House seemed to concede the completion of Nord Stream 2 in an effort to strengthen transatlantic relations between the U.S. and Germany.

In response to the Russian invasion of Ukraine, Germany’s new Chancellor Olaf Scholz announced the suspension of the certification process of Nord Stream 2. In the absence of certification, the gas pipeline remains idle as European energy prices stay stubbornly high and climb increasingly higher. This is just one of the many sanctions that have been placed on Russia in response to the invasion of Ukraine.

From a practical perspective, it is a pity to imagine that the Nord Stream 2 pipeline may forever stand idly across the Baltic Sea as the elements wear it down into disrepair due to the breakdown of the preceding European security order. If that ends up being the fate of this decade-long resource management project, it would be both a symbol of a tremendous misallocation of resources as well as a regretful loss of a valuable instrument of cooperation that may have played a part in dulling the escalation of tensions that have led to a major war occurring again in Europe.

Without the prospects of reliable natural gas flowing from Russian sources, Germany and the rest of Europe will have to look elsewhere around the globe, but the supplies are stretched. Perhaps the U.S. will finally fulfill Senator Ted Cruz’s bucket list by reaping the benefit of delivering Texas produced American liquefied natural gas (LNG) to Europe. Already, the global LNG market has seen a major repositioning in the direction of Europe as prices spiked in response to the conflict and sanctions on Russia.

For now, Germany is looking at non-Russian natural gas-based energy solutions. The country is in the end stages of closing down its last nuclear reactors and is turning to old coal power plants in order to ensure its near-term energy security. France, on the other hand, has continued to produce nuclear power as Germany has turned its back on it. Nuclear may yet play a larger role in this pivot of European energy sources.

The shortage of energy sources in addition to many of the critical commodities sourced from Russia before the onset of these harsh sanctions will have painful impacts on both Russia as well as those who rely on some aspect of the Russian economy, including the sanctioning countries themselves. Perhaps the Nord Stream 2 pipeline could have served as an obstacle to Putin’s military engagement with Ukraine. It is a terrible state of affairs that has resulted from three decades of friction between the West and Russia and a great tragedy that did not have to come to this point.

Source: