After the Ukraine Invasion: Sobering New Energy Terrain Op-Ed Explainer

Russia’s invasion of Ukraine and the West’s response are ushering the world into a new energy, economic and political era. In broad outline, this new era will have less-globally-integrated energy markets and less-secure supplies of fossil fuels.

Since energy is a foundation of economic activity, this translates to a precarious global economy and a likely reordering of national alliances. We are, in short, living through a moment that may be as politically and economically transformative as the World Wars of the 20th century, though with little likelihood of an outcome anywhere near as desirable as the boom decades of the 1920s or 1950s.

While the post-invasion landscape features plenty of new threats to the global economy and food system, I’ll focus on energy, since all else flows from it. The following seemed to be a small news item in comparison with other events and risks detailed further below, but it’s emblematic of the new era we’re entering.

In March, major oil companies, including ExxonMobil,¹ Shell and BP,² announced that they will cease collaborating with the Russian petroleum industry, which includes the state-owned energy giants Lukoil and Gazprom. This will likely have implications more far-reaching and long-lasting than President Joe Biden’s ban on imports of Russian oil and gas to the United States.

Russian oil and gas resources and production are enormous; the country supplies over a tenth of the world’s oil and 7% of the world’s gas. But many of the country’s oil and gas fields were initially developed decades ago and are no longer able to maintain former rates of flow. In 2021, the Ministry of Energy of the Russian Federation forecast³ that the nation was at peak petroleum-production levels and would probably never exceed pre-COVID-19 rates of output.

For many years, Russian producers have depended on the expertise of giant foreign companies like ExxonMobil to help manage depleting fields and keep production up for as long as possible. Production cooperation agreements required years of negotiation, along with the transfer of key personnel and billions of dollars’ worth of infrastructure.

With those agreements now in tatters, it is unlikely that Western oil companies will revive them quickly once the war eventually ends. Whether export embargoes continue or not, Russian oil production will begin to decline. And unless the Russian oil industry obtains investment and expertise from China and India, the declines may happen faster than almost anyone would have predicted.

This comes at a time when global oil production has remained below November 2018 levels for the past 29 months. Demand has been made volatile by the pandemic, leaving companies wary to start new projects. At the same time, the industry is running out of places to drill. Oil discoveries have been declining for decades; discovery levels for 2021 were the lowest in 75 years.⁴

This spring, oil prices spiked to $130 per barrel, with some commentators forecasting even higher prices going forward. At that time, as Rystad Energy’s Senior Analyst Louise Dickson pointed out,⁵ the market had probably not fully factored in the potential impact of reduced Russian production and exports.

If oil prices move well above $100 per barrel, the results could be severe. In the last 75 years, a recession resulted each time oil prices roughly doubled (as happened in 1972, 1979, 1990, 1999 and 2008).

In July and early August, recession fears pushed oil prices down somewhat – thereby both confirming the link between oil availability and the state of the economy and also flashing a warning signal to the oil industry that, while prices may be high now, if the economy tanks, then today’s investments in harder-to-produce oil may not pay off.

While the world uses oil more efficiently now than it did decades ago, it is still overwhelmingly dependent on petroleum for transportation and agriculture. The switch to electric cars is happening far too slowly to make much of a difference over the next couple of years.

So, what are the options to maintain affordable oil prices and avert economic mayhem?

In the United States, there have been calls to open the taps on domestic oil and gas production in order to ease prices. The assumption that U.S. producers can simply turn on their spigots is understandable, given the industry’s last few years of astounding success at coaxing millions of barrels per day from rock formations on which geologists had long ago given up. And it’s true that tight (shale) oil wells can be brought online much more quickly than conventional wells. World conventional oil production had been on a plateau since 2005, a year that saw the height of “peak oil” awareness as measured by Google searches.

Since then, salvation has come from unconventional oil, a category that includes Canada’s oil sands and U.S. tight oil, sometimes called “shale oil,” produced by horizontal drilling and hydrofracturing. (It’s called “tight oil” because it’s locked up in the pores of rock that has very low permeability, often shale, so that the oil doesn’t flow easily.)

Between 2006 and 2019, the United States went from pumping about 5 million barrels of oil per day to over 12 million barrels — a rate of growth never before seen anywhere in the world. But now, after more than a dozen years, shale’s shine is fading. Fracking producers have cut back on drilling after getting hammered by lower prices during the pandemic while having no discipline about curtailing production. Now, investors are much more circumspect and demand returns on their investments — returns they are now seeing due to high prices.

But that isn’t the full story. Most production and profit have come from small sweet spots within the larger geological formations that frackers have targeted. And those sweet spots have been drilled so full of vertical holes and horizontal extensions that there’s hardly room for more.

As David Hughes, advisor at the Post Carbon Institute, has documented in a series of detailed studies,⁶ only the Permian Basin in Texas still has significant growth potential.

The Bakken Formation region in North Dakota, an enormous source of petro-optimism just years ago, is already in terminal decline, as are most other tight oil plays. U.S. production may increase slowly and marginally from its current levels, but only for a few years until the effects of depletion elsewhere overcome rising production in the Permian Basin – and until the Permian Basin itself ticks over into decline later this decade.

The U.S. Strategic Petroleum Reserve holds only about a week’s worth of world oil supply. Of course, there is zero likelihood that it would be emptied in such a short timeframe. This reserve is meant to help the nation and the world get through just a few weeks of supply difficulties. If drawn down by a couple of million barrels per day, it would be exhausted in a year.

There is talk of the United States helping Venezuela increase its oil production⁷ as a way of offsetting any global loss of Russian crude, as Venezuela boasts enormous reserves of extra-heavy oil. However, terrible relations with the United States during the Chávez-Maduro years led to sharply declining production.

This spring, Washington sent a high-level delegation to Caracas, and President Nicolás Maduro freed two U.S. prisoners (one of them an oil executive). But Venezuela’s oil, however plentiful, will be slow and expensive to access and there will be an enormous environmental price to pay.

Adding to the complexity is the fact that Venezuela and Russia have been cozying up in recent years. Venezuela’s oil ministry now says, without offering a timeframe, that the country might be able to hike production by 400,000 barrels per day⁸ if granted the licensed exemption from U.S. sanctions. Or is this just an empty promise designed to help end the sanctions?

What about the Organization of the Petroleum Exporting Countries? Reportedly, in March, the Saudis wouldn’t even answer the phone⁹ when Biden called to ask their country to supply more oil to world markets. Biden has since visited the kingdom, but it’s unlikely that increased oil production will ensue. Most of the Middle East’s oil fields are significantly depleted,¹⁰ so raising production by much now would damage reservoirs, reducing future capacity.

The world is feeling the brunt of oil shortage where it hurts most: global diesel fuel supplies are at the lowest level¹¹ since 2008. Diesel is essential to trucks, which move raw materials and finished products of all kinds. Without diesel, the machinery of civilization would seize up within days. Some U.S. truck stops already ration fuel to customers.¹²

Many environmentalists are promoting the notion that electric vehicles and solar panels can rescue the world from dependence on Russian oil and gas. But a renewables build-out would be glacial in pace, requiring massive new infrastructure.

After the past 20 years of dramatic expansion in wind and solar, these two sources together currently supply the world with just 3.3% of its energy.¹³ And there are doubts about the sufficiency of raw materials for building panels, turbines and batteries at a vast scale. As I have written elsewhere,¹⁴ the real energy transition will almost certainly not be a complete and seamless migration from fossil fuels to solar and wind, but rather a shift from using a lot of energy to using a lot less.

A large-scale transition to nuclear power would share one challenge with renewables — the need for massive electrification of industry and transportation. But to this it adds higher construction costs, uranium depletion, and added environmental and political risks.

Coal is not immune to contagion from the rising prices of oil and gas. This spring, spot coal prices in China reached nearly double the government-set price cap. While there were domestic reasons for the price spike, there is also an international dimension: with natural gas potentially in short supply because of the Ukraine war, prices for shipments of coal are trending skyward. At the same time, many of China’s coal mines are getting more expensive to operate due to depletion.¹⁵

In short, the world is now grasping at straws in its efforts to maintain affordable energy flows. We are probably near the inflection point that analysts who track resource depletion have long warned about.

Regardless of the strategy chosen, total energy usage will likely be unable to grow much and may start to decline. Rising energy prices will periodically destroy demand by shrinking the economy, thus lowering demand (and prices) temporarily until economies can partially recover; then prices will be bid upward once more.

The cycle may continue to repeat itself, each time at a lower level of economic activity and energy usage — though there is an outside chance that we will see a blowout of the financial system that lowers demand dramatically, once and for all.

The only sensible way forward would be to cooperatively manage production and consumption through rationing¹⁶ in order to reduce shocks and adapt to new and continuously shifting economic conditions — while building as much renewable infrastructure as we are able to while we have the means.

This is an edited version of an article initially published in the Museletter of the Post Carbon Institute. It was reprinted with permission from the author.

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Clarification: After the publication of this article, Russian President Vladimir Putin intensified the war effort in Ukraine because Russia was not succeeding. Ukrainians talked about planning an ambitious green reconstruction. Russia switched off Europe’s main gas pipeline. And the International Atomic Energy Agency sent observers to the Zaporizhzhia nuclear plant.

About the Author

Richard Heinberg is a senior fellow at the Post Carbon Institute and the author of many books on energy and the environment, including “Power: Limits and Prospects for Human Survival;” “The End of Growth: Adapting to Our New Economic Reality;” and, with David Fridley, “Our Renewable Future.” He’s won an award for excellence in energy education and has been published in Nature, The Wall Street Journal and Literary Review. Heinberg’s work is cited as one of the inspirations for the international Transition Towns movement, which seeks to build community resilience ahead of climate change.