The White House says Russia is ‘weaponizing’ energy

As European sanctions loom, U.S. and European Union leaders say Putin is using oil and gas flows to pressure the West.

By Alexandra HartSeptember 12, 2022 4:58 pm

We’re nearing the end of summer, and before long it will be time to fire up the furnaces as temperatures drop. But for Europe in particular, energy costs are expected to be through the roof as the Nord Stream 1 pipeline remains offline, cutting natural gas flows from Russia to Europe. 

Russia blamed an oil leak for the continued shutdown of the pipeline, but the White House has said that Russia is weaponizing energy to put pressure on the West. 

Matt Smith, lead oil analyst for the Americas at the analytics firm Kpler, has been keeping an eye on the situation. 

This transcript has been edited lightly for clarity:

Texas Standard: Can you give us a quick refresher on the oil sanctions on Russia and the effects they are having on Europe and the rest of the world?

Matt Smith: So first off, in terms of the sanctions, they’re going to be coming through in early December on the oil side of things. And although we’ve seen sort of the EU 27 countries dial back on Russian flows so far, they’re still importing about a million barrels a day of Russian crude. So they’re going to have to find a replacement for that to backfill the loss of that Russian supply. And Russia is either going to have to find a new home for that 1 million barrels a day or cut its own production. But that’s just for the crude side of things.

European sanctions do not start for clean products – so for gasoline and for diesel – until a couple of months later. But given everything that we’re seeing in terms of the weaponizing of natural gas, we should expect to see some form of retaliation or lack of reliability in supply from Russia the closer we get to sanctions kicking in. At the same time too there is talk of a price cap being placed on Russian crude, which is essentially these European countries, G7 countries and everyone else that buys the crude, agreeing to only pay a certain discounted price for Russian crude oil. But this is a challenging proposition, because India and China are buying this oil from Russia at a cheap price. Plus, it’s somewhat being taken for granted that Putin is going to agree to a price cap, which seems a bit unlikely given everything we’ve seen on the natural gas side of things.

As a layperson watching this, I’m a little confused, because I’m hearing about astronomical energy prices already sort of threatening Europe, and sanctions haven’t even kicked in. Isn’t that likely to make the situation worse?

Absolutely. So if we just look at the natural gas side of things, Russia is targeting natural gas first because Europe is so reliant upon those flows, and it has little alternative. You know, it cannot pull in enough LNG, liquefied natural gas, from elsewhere. It doesn’t have the import capacity. And Europe essentially relies on Russia to meet 35% of its natural gas needs. So as you mentioned, with the Nord Stream pipeline, as sanctions have been talked about in a price cap put on Russian energy, Putin has simply just turned off the taps for that natural gas, which is wild, you know, because what they’re doing is they’re flaring it – essentially lit it on fire and are burning it into the atmosphere rather than sending it into Europe simply because there’s this war going on.

And this is exactly what the White House is calling weaponizing natural gas. What do you think we could expect to see from the Russians going forward? More of this?

Yeah, absolutely. Just as we get the sanctions kicking in on the crude side of things and on the products, we should expect to see a similar tack taken by them in terms of, you know, just not being reliable. And the thing is as well, we’ve seen this with natural gas: If they don’t supply it, the price of it is going through the roof. And so Russia is still getting those revenues, even though that’s the one thing that the West is trying to stop them getting.

So how is Europe responding to the situation right now?

Well, you know, they’re stuck between a rock and a hard place because they’re obviously, you know, not wanting to fund the war, which is essentially what’s happening by giving these revenues to Russia. But you’re looking at Europe paying skyrocketing energy prices. So to put that in context with the U.S. here, we pay about $8 MMBtu you for natural gas. In Europe it got up to 95, close to $100 MMBtu in recent weeks there. So, you know, there’s costs – you’ve got manufacturing companies shutting down; you’ve got people that are going to have to choose between heating or eating. So there just isn’t a good solution to this.

Let’s talk about the U.S. position here. What does that mean for us at home? And ultimately, what’s it mean for Texas?

There’s the phrase “in the land of the blind, the one-eyed man is king.” And that’s kind of what the U.S. is like here, because even though we are paying – natural gas prices are higher in the U.S. – they’re nowhere near what they’re paying in Europe. And so we should expect to be paying higher electricity bills this winter. But at the same time, to nowhere near the same extent as this is happening in Europe.

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