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Fifty years ago the Yom Kippur War marked the beginning of a new stage in the history of international energy relations. With more than a hint of déjà vu, we are living in times reminiscent of those critical years: an embargo on Russian oil; Russia’s subsequent response of reducing and then interrupting Europe’s gas supply; the price hikes on both forms of fuel; inflation shock; stagflation; energy saving measures, energy security returning to the forefront of national political strategy and international relations. Given the similarities between these two moments in time, the resulting question is unavoidable: will the war in Ukraine mark the beginning of a new stage in the history of international energy relations? If this is the case, what will be the main shifts, and what will their implications be in a post-post Cold War world?

The consequences of the Yom Kippur war

The Yom Kippur War drove the heaviest consumers in the West (the United States and Europe) to look for new locations to produce and export crude oil in order to reduce their dependence on the Middle East and rein in the market power of OPEC member-states. From this moment on concentrated trade between a handful of geographic areas, which had dominated petroleum industry operations until the 1970s, gave way to a more open stage, with imports coming from North America (Canada and Mexico), Europe (the United Kingdom, the Netherlands, Norway), Latin America, Africa and, later on, Russia and Central Asia. At this time, countries in the Middle East were pivoting their imports towards East Asia, which would, in time, go on to become the largest global importer of crude oil.

Photo_ Spinster Cardigan_ CC BY 2.0

Together with the changes to trade flows and pricing systems, the war also marked a turning point in power dynamics among the main players of the petroleum business. For decades, the aforementioned Seven Sisters had not only determined the system used to decide the price of crude oil, the allocation of extraction areas (excluding the United States and the Soviet Union) and the distribution of profits among companies and oil-producing governments; they had also established firm control over the distribution, refining and marketing of petroleum products. [2][2] Yergin, D. The Prize, Simon and Schuster, New York, 1990.

The implementation of this corporate structure, which had government support in the countries where these companies operated, ground to a halt when exporter countries forced the nationalisation of fossil fuel production. From this point on, polyarchy, or a large variety of players in different positions of relative power, has become one of the defining features of the international petroleum industry.

Within this polyarchy International Oil Companies (IOCs) have maintained a presence in the background, despite having lost their privileged positions in primary extraction sites. They have also maintained their technological and commercial power and, as a result of mergers which were finalised at the end of the previous century, they stand to benefit greatly from the continual rise in oil prices. The same has been true for OPEC countries. Their ability to influence market conditions has proven much weaker than expected or commonly assumed, but in spite of this price dynamics have been extraordinarily kind to them. Therefore, while the cartel’s influence has declined, the power held by its members, much like large, non-OPEC exporters (above all Russia), has been increasing in economic, political and even military terms. Looking specifically at the energy sector, this power is wielded by state-run companies (National Oil Companies, or NOCs), who control the majority of the world’s crude oil and natural gas reserves, some of which now have their own distribution networks, refineries, marketing companies and interests in other industries. [3][3] Palazuelos, E. «Modelos de oligopolio en la industria petrolera: Las «Siete hermanas» versus la OPEP», Revista de Historia Industrial, 48. Año XXI, 2012, pp. 119-152.

The emergence of China has added new layers of complexity to this polyarchic—and increasingly conflictive—world order, making it even more difficult for the United States to control the strategies of producer countries. Faced with a continually growing demand for energy, the Chinese government has been actively participating in the formalisation of long-term contracts for purchasing large quantities of crude oil, while simultaneously reaching agreements with exporters regarding their companies’ participation in extraction projects and the construction of transport infrastructure. In this way, the policies of the Chinese government and Chinese companies have further strengthened the negotiating power of producer countries as a reliable alternative to the unilateral and secure supply of the North American model, combining production capacity with a lack of political interference.

Lastly, following the crisis of 1973, international energy relations ceased to revolve exclusively around petroleum. To confront rising prices and the nationalisation of resources by exporting countries, the governments of high-consuming countries promoted policies focussed on saving and diversifying their energy sources. Nuclear power and natural gas, which abound in Canada, the United States and the North Sea, emerged as alternatives which would, it was presumed, reduce dependency on outside sources. For various reasons the development of the former (nuclear) did not meet initial expectations. On the other hand, the development of gas, though slow to start, eventually took off thanks to a combination of factors: its economic and environmental advantages over petroleum and coal in the generation of electricity, and over coal and electricity in heating homes and buildings; large-scale, low-cost agreements made between European countries and the former Soviet Union; the development of liquid gas, fundamental to the gas business in East Asia; the appearance of new producers (Norway, Qatar, Australia); the development of fracking, and so on. In this way international energy relations ceased to hinge solely on petroleum; gas came onto the scene with its own business structures, trading mechanisms and power dynamics.

Will the war in Ukraine bring in significant changes in the structure of energetic trade?

Let us return to our original question: has the war in Ukraine caused changes in trade flows, pricing, power dynamics and energy sources that rival those caused by the Yom Kippur War? Are these changes so profound as to affirm that we are currently facing the dawn of a new era in the history of international energy relations? Of these questions it is, without a doubt, the first that has been answered most immediately. Indeed, there has probably never before been such a rapid and intense change in the structure of trade as that seen in recent months.

On March 8th, days after the invasion began, the United States announced that they would stop importing Russian petroleum. Keeping in mind that trade between the two countries was insignificant at most, we can easily deduce that this move was not intended to cause direct harm to Russia’s economy, but rather to set in motion a campaign that would pressurise the EU into following suit and joining the embargo. The campaign was successful, and set off a chain reaction which, though predictable, was quite dramatic: a reduction in European petroleum imports, cuts to Russian gas supplies, skyrocketing prices of both fossil fuels, and a restructuring of commercial relations at an international level.

With regard to petroleum, Russia began selling in Asia what it had previously sold in Europe, in return for granting substantial price breaks to buyers and paying hefty premiums to shipping companies. For their part, Europe began to buy oil, previously supplied by Russia, from the Middle East, Africa and Latin America, although European refineries have yet to find a simple substitute for the Russian oil commonly used in the production of diesel and other derivatives, which has made the price hikes on these products especially acute. At the same time Europe’s search for oil in other regions and the reorientation of Russian trade towards Asia—which is expected to intensify from December onwards when the European ban on the purchase of Russian oil (by sea) comes into effect—will make way for other large exporters to raise their quotas and for significant shifts in the destination of their sales.

If, as the United States has proposed, and the EU has suggested in REPowerEU, these investments are made and the disconnection becomes permanent, then the gas industry would be set to undergo a radical transformation. The Middle East, closely followed by the United States, could become the main supplier to the EU, complemented by exports from Norway and Algeria. At the same time Europe will become a secondary natural gas market due to its reduced consumption, and this will leave East Asia as the dominant, burgeoning market.

Unlike in the case of oil, Russian gas will stick around for a defined period of time until it can, little by little, make its way into the Asian market, which is currently served by the Power of Siberia pipeline through which, for the time being, no more than 60bcm of natural gas can flow towards China and the liquefaction plants located on the island of Sakhalin. For gas to make its way out of Western Siberia, where the majority of reserves are concentrated, Russia would need to build extremely long gas pipelines, as well as deploy the northern project in order to normalise the transport of maritime freight traffic through the Arctic, from the liquified gas plants in Yamal (in Western Siberia) to the Pacific. Both projects require time and funding (of which there is certainly no surplus among Russian businesses) and, in any possible scenario, the price of this gas once it reaches Asian markets may render it quite unprofitable, or perhaps uncompetitive, in comparison to other available options. [4][4] Oxford Energy Studies: OIES Podcast Series: Impact of Russia-Ukraine War on Energy Markets Series.

The first consequence of the above is that relative scarcity in the global gas market (where Russia makes up a quarter of the entire exported supply) will continue beyond the end of the conflict, causing gas prices to remain above prewar levels.

The second consequence is that if the major Eurasian pipelines, through which three quarters of Russian exports and more than a third of European imports used to pass, are no longer in use, world trade in natural gas will be dominated by liquefied gas and LNG carriers. Before the war, maritime trade accounted for around 40% of all international transactions. By paralysing the backbone of the onshore gas trade a large market for liquified gas, not unlike the oil market, would be established.

The third consequence is that Russia will lose its overall position as the world’s main exporter, placing the Middle East and East Asia at the forefront instead, with other countries such as Iran and Saudi Arabia soon joining Qatar at the head of the pack. In this way, the majority of energy trading—both gas and petroleum—will come to be concentrated in the Indo-Pacific area. Incidentally, the United States will be able to take advantage of developments in their own national industry, as well as pricing conflicts and Europe’s need to find an export route for a small part of their own product. However, this export position is unlikely to be long-lasting, as gas reserves which are mined through fracking have relatively short life cycles.

To conclude, the changes to the gas market are expected to be further-reaching than those in oil. If we look at both together, there can be no doubt that few one-off shocks have had as big an impact on international energy relations as the war in Ukraine. But will this war have the same impact as the Yom Kippur war on the formation of prices and the power of different actors?

Continuity in the formation of prices and power dynamics

Before the war, a new, bullish super-cycle already seemed to be underway, much like those recorded in 2000-2008 and 2011-2015. Following the invasion of Ukraine, the price per barrel of Brent crude oil reached as high as 97 USD. At the beginning of March, when fears were confirmed that the energy trade could be affected by the conflict, this price peaked at 120 USD, and natural gas skyrocketed up to 217 EUR per Mw/h, and continued to rise until it hit its maximum of 276 EUR in August (compared to 48 EUR in August 2021).

In the wake of the Yom Kippur War, the price shock led to a change in the pricing system a few years later. Currently, the impact on prices and production is so pronounced that initiatives have once again emerged—of course, within the bounds set by the EU—which seem to call energy pricing systems into question.

After this, attention has turned to gas; firstly because it was the energy source responsible for the increased price of electricity, and secondly because its elevated price also affected end users. The price of electricity was thought to be exceptionally high as a result of the war and, accordingly, the EU proposed pooling purchases among large European importers. Despite reforms made to the gas pricing system, this had the exact aim of making importers—now separated from distributors and consumers—compete with one another for supply in markets that were created ad hoc on the insistence of the EU itself.

Following this, the levying of taxes on gas and oil companies has been approved, given that these companies are reaping enormous profits thanks to exceptional increases in the price of fossil fuels caused partly by the war, and partly by speculation. Finally, discussions are underway to impose a price cap on oil and gas coming from Russia, in light of the “discovery” that the system of oil and natural gas price formation, the former since the 1980s and the latter since the 2000s, has allowed Russia to make more money by exporting less product. This effect is not the result of some war-provoked anomaly, but of two interesting features of the oil market, both of which have extremely beneficial repercussions for producers.

The first of these is that upstream companies operate with very different production costs, given that physical and technological conditions vary greatly from one extraction site to another. This means that reference prices, which are established in spot markets, are systematically set far above the production costs of the companies who dominate the majority of the world’s crude oil reserves (this includes, among many others, Russian companies). In a bull market this margin always generates astronomical profits, nowadays for Russian producers, as it has always done for all others. The justification for this has always mirrored that of the electrical sector, even though now is coming under criticism: this is how consumers can always be guaranteed a supply to meet any possible level of demand.

The second of these features is that the daily prices paid by traders in short-term markets are increasingly financialised, meaning their prices are increasingly determined by the futures prices set in paper markets. More and more, non-commercial traders are participating in these markets, and for them any change, be it real or imagined, to any supply or demand variable which may affect prices stimulates the generation of mutually reinforced expectations, self-fulfilling prophecies and narratives justifying both sudden rises and sharp drops. This is how these prices—future prices which become daily prices—are presented as one seamless, if exaggerated, image of what really goes on in the petroleum industry, in what experts refer to as market fundamentals. [5][5] Fernández, R. (2022): Economía Política del mercado de petróleo: flujos, actores y precios, Papeles FUHEM Crisis Energética (y de materiales), nº 156.

Instability intensifies these dynamics, causing prices to rise not just beyond the costs of most producers, but also, inevitably, far beyond the (always unknown) costs of those who operate within a relatively small cost-profit margin. This is not a new situation, it has been the norm for decades, especially since the beginning of this century, and sits at the root of an enormous system for transferring profits on an international scale, the political and economic implications of which are hard to overstate.

The war in Ukraine is by no means independent from these implications, as the Russian government has been lining its pockets for two decades thanks to this system, and the United States has been causing conflicts and quarrels in the region to protect it for even longer. It has led some players to propose interventions in price formation, arguing that the reference markets are too financialised, or that it is not exactly desirable for large windfall profits to enrich authoritarian regimes. Nevertheless, these proposals are almost always motivated by opportunism, as they focus on exceptional or transitory corrective measures, or on highlighting some aspects in isolation without looking at the bigger picture, thus failing to interrogate the fundamental logic which underpins the way prices are decided in the three main energy markets of petroleum, gas and electricity.

Additionally, these proposals almost always come from organisations or people who have very little influence on international energy market regulations. It is true that the changes which followed the Yom Kippur war were not felt until ten years later, but at that time the political economy was conducive to system-wide transformation, which was imposed by the United States in order to deprive large producers of their ability to select their own prices, and done under regulatory principles in keeping with the dominant interests of the nascent neoliberal era. Currently, with prices sitting well above one hundred USD, neither the United States (who are close to energy self-sufficiency and have a growing domestic industry) nor IOCs, OPEC members, their state-owned companies, or other gas and oil producing nations, appear to be the slightest bit interested in changing the pricing system for fossil fuels. Obviously, the same can also be said of the traders and myriad other financial organisations with direct or indirect ties to this industry.

All of this is to say that it does not seem that the war in Ukraine will unleash a widespread restructuring of the pricing system—and along with it the system which internationally distributes fossil fuel profits—since the war does not seem to be causing significant transformations to the power dynamics among those who benefit from this distribution. Russia will obviously be weakened, and the EU will continue to pursue its background role even though it now wishes to move towards a shared energy policy, something that it has never had before. All other players, however, will emerge stronger.

Companies will emerge from the war, if anything, more confident in the extreme profitability of an industry which, both directly and indirectly, is responsible for the vast majority of greenhouse gas emissions, and governments will undoubtedly emerge more determined to approach their relations with other actors in even more starkly realistic terms than in the past. This will likely be especially noticeable in the Middle East, where innumerable conflicts and unsettled scores between countries (and between social groups within each country), have built up after decades of scheming and interference. To this we can now add tensions which are likely to arise as attempts are made to dismantle Russia’s presence in the region and to counter China’s growing influence in both “friendly” (Saudi Arabia, United Arab Emirates, Iraq) and “enemy” (Iran and Russia) countries. Rivalry with China (and Russia) may also take the form of attempts to control shipping routes, or occasional squabbles over access to resources in Central Asia, Latin America and Africa.

Energy security as a catalyst for transformation

Now that we have reviewed trends in relation to market flows, prices and power dynamics, all that remains is to look at the possible consequences of the war on changes to energy supply, and it is here that there is more room for optimism. The crisis in the 1970s stoked concerns about energy security and paved the way for the development of natural gas and nuclear energy as alternatives to petroleum. In much the same way the war in Ukraine, which has awoken the same fears regarding energy security, may become a decisive supporting factor in the transition towards renewable energy sources.

Beyond its environmental implications (which are, of course, the most important), this transition also holds revolutionary potential from a political perspective, because it can act as a catalyst to transform the current system of international energy relations. It has the potential to radically alter trade flows, to force changes in pricing and to impact existing power dynamics.

With regard to trade flows, all countries would become rich in resources for the production of electrical energy, thus putting an end to the dichotomy of unidirectional commercial axes which connect producing regions to consuming regions, meaning international trade would come to be based more on regional interconnection. With regard to trade mechanisms and the rules governing prices, nothing would have to change, but what is certain is that the need to accelerate the green transition constitutes a fundamental incentive to intervene in pricing and in the distribution of profits created by any and all sources of energy. With regard to key players, the displacement of fossil fuels from its central role would also mean the displacement of governments and companies who have occupied this spot for most of the last century. The large companies which dominate thermoelectric production, as well as many petroleum and gas companies, will continue to play a fundamental role, not only as producers of fossil fuels but also in the production, distribution and sale of renewable energy, though they will have to share the stage with companies in other sectors (manufacturers of solar panels, wind turbines, batteries, electrolysers, infrastructure and so on). That being said, renewables are likely to enable greater participation for smaller businesses, local communities and other organisations, both in terms of production and consumption.

We must, however, be cautious, because the fight for access to new primary materials which are needed to manufacture equipment and the technological and financial challenges which the green transition must tackle (large-scale electricity storage, development of hydrogen as feedstock and fuel, producing batteries for electric vehicles, digitalisation and securing networks, capacity installation and so on) could be the source of major conflicts among businesses and governments, and also between groups of people depending on how the costs and benefits are distributed.
It is possible (though not guaranteed) that we will soon leave behind the final stage of an era in which international energy relations have been dominated by fossil fuels, not because of the war in Ukraine, but because of the green transition. It would be desirable (though, again, not guaranteed) if in the period that follows we are able to avoid repeating many of the dynamics which governed the last.

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