Petrol prices in the United States and around the world have hit highs not seen since 2014. With the Russian invasion of Ukraine resulting in decertification of the Nord Stream 2 pipeline and the subsequent Western sanctions, prices are expected to climb even higher, but China will not have to pay the price.
Senate Minority Leader Mitch McConnell (R-Ky.) warned that China, North Korea, and Iran are watching the United States right now, and that America’s handling of the Ukraine crisis will determine the future behavior of these belligerent states. He went on to say that all free nations would be imperiled if Russian President Vladimir Putin were not stopped. McConnell demanded more severe sanctions be placed on Russia than those that followed Russia’s previous invasions of Ukraine and Georgia.
Last year, the United States pressured Berlin to halt the Nord Stream 2 gas pipeline, which connects Russia with Germany. Germany regarded U.S. intervention in the pipeline deal as an infringement on the nation’s internal affairs. The United States, however, claimed that the pipeline would grant Russia too much influence over Europe and NATO. Additionally, the Biden administration said that it needed the pipeline issue settled because it wanted Germany onboard as a reliable ally to counter China.
The two nations reached a negotiated solution in which Germany would continue to purchase Russian natural gas, but it was obligated to extend financial assistance to Ukraine. The existence of the pipeline meant that Kyiv would lose $2 billion a year in Russian transit payments. To help mitigate this loss, Germany established a $1 billion fund to invest in Ukraine green energy.
The United States and Germany also agreed to work together to end Russia’s energy dominance in Europe. Russia hawks in Congress were not happy, as they wanted the project halted immediately. Sen. Ted Cruz (R-Texas) was among the critics of the deal, saying that future generations of Russian dictators would be reaping the benefits of the pipeline.
The Nord Stream gas pipeline system. Congressional Research Service
Germany also signed an agreement with the United States to bring sanctions if Russia tried to use its energy dominance against Ukraine. Kyiv expressed concerns that if Russian fuel were no longer transiting through Ukraine, Russian officials would be emboldened in their interactions with the country. The Biden administration urged Moscow to agree to continue to transit some fuel through Ukraine, despite the pipeline’s completion, last August.
Germany has always been concerned that shutting down the pipeline would cause an increase in the price of oil and gas, including petrol. Europe buys 35 percent of its natural gas from Russia. Currently, the gas travels via the Yamal-Europe pipeline, which crosses Belarus and Poland to Germany; whereas Nord Stream 1 traverses Ukraine and ends in Germany.
Global demand for oil and gas should remain the same, regardless of a Russian invasion of Ukraine. But if Russia is prevented from selling its gas to Europe, then the supply will decrease, driving up prices. In 2006, Russian state-energy company, Gazprom, cut off the gas supplies transiting through Ukraine and the effects were immediately felt across Europe.
Soon after Russia launched a full-scale invasion of Ukraine and recognized two breakaway regions of Ukraine—the Donetsk People’s Republic (DNR) and Luhansk People’s Republic (LNR)—German Chancellor Olaf Scholz vowed on Feb. 22 to decertify the Nord Stream 2 pipeline. Two days later, European Union leaders imposed sanctions on Russia’s financial, energy, and transport sectors, all of which will drive up the price of energy and possibly create shortages.
Over the past year, LNG imports to Europe from the United States have climbed. But it is unclear what plan, if any, Europe or the United States have to replace all of the lost oil and gas from Russia. European gas costs are now set to be $200 billion higher than January forecasts.
Russia is a member of OPEC Plus and produces about 10 percent of the barrels of oil sold in the world. Also in OPEC Plus is Kazakhstan, which is a current member of the Russian-led Collective Security Treaty Organization (CSTO). As the world is apparently drifting into pro-Russia and anti-Russia camps, a gas shortage or price increase could be exacerbated by OPEC members siding with Russia.
Russia’s ability to sell energy to China may mitigate sanctions and wind up being a win for the Chinese Communist Party (CCP). In 2021, the two countries increased their energy trade to over $140 billion, and expect to further increase it to $200 billion by 2024. They are also working on the Power of Siberia-2 natural gas pipeline—a proposed mega pipeline through Mongolia—to provide Russian energy to China.
The icebreaker Tor at the port of Sabetta in the Kara Sea shoreline on the Yamal Peninsula in the Arctic circle, some 1,522 miles of Moscow, on April 16, 2015. The Yamal LNG (liquefied natural gas) project aiming to extract and liquefy gas from the Yuzhno-Tambeyskoye gas field is scheduled to start production in 2017. Russia's Novatek holds a 60 percent stake in the venture. France's Total and China's CNPC hold 20 percent each. Kirill Kudryavtsev/AFP via Getty Images
Another location where this new conflict is being played out is the Arctic. Chinese state energy companies and government-backed investment funds have invested heavily in liquefied natural gas in the Arctic. Since 2013, the CCP has acquired significant interest in two projects by Russian gas company Novatek. They now hold a 30 percent stake in the Yamal LNG project and a 20 percent stake in the Arctic LNG project.
Last week, gas prices have almost “jumped 19 percent to 105.6 euros a megawatt-hour on the TTF exchange in the Netherlands,” according to The New York Times. The price of natural gas and liquid natural gas will continue to increase around the globe if Russian gas is removed from world markets.
If sanctions prevent the world from purchasing Russian gas, then China will become a monopsony, a single buyer. As a monopsony, the CCP will get to dictate the price China will pay for Russian gas, which will most likely be below the market price.
The rest of the world will be facing rising energy costs and possibly shortages and blackouts, coupled with increased supply chain disruption. Meanwhile, China will have easy access to inexpensive energy, which it can use to manufacture cheap products and, thus, dominate world markets.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
Antonio Graceffo
Author
Antonio Graceffo, Ph.D., is a China economic analyst who has spent more than 20 years in Asia. Graceffo is a graduate of the Shanghai University of Sport, holds a China-MBA from Shanghai Jiaotong University, and currently studies national defense at American Military University. He is the author of “Beyond the Belt and Road: China’s Global Economic Expansion” (2019).
