Game of responsibilities

“Based on the available information, Russia is fulfilling its long-term contracts with European counterparts – but its exports to Europe are down from their 2019 level. The IEA believes that Russia could do more to increase gas availability to Europe and ensure storage is filled to adequate levels in preparation for the coming winter heating season. This is also an opportunity for Russia to underscore its credentials as a reliable supplier to the European market.”

This is an excerpt from an IEA Statement on recent developments in natural gas and electricity markets, issued last September when the first signs that Europe was on its way to an energy crisis began to appear. The agency went on to reiterate the call for Gazprom, and by extension Russia, to prove they are a reliable partner to the EU, effectively suggesting they were, in fact, unreliable and oh, the shame.

“We call on oil and gas-producing countries to act in a responsible manner and to respond to tightening international markets, noting that Opec has a key role to play.”

This is a rather more recent statement, made by the energy and environment ministers of G7 who last week met in Germany to discuss a way out of the current unenviable energy security situation across the group.

In case this call sounds familiar, it’s because it is. OPEC has become very popular with the Western political crowd in the past year. First, President Biden called on the cartel to boost production more quickly because prices at the pump were rising and that always makes the White House nervous. Then he threatened the cartel in November because OPEC refused to boost production.

"There are other tools in the arsenal that we have to deal with other countries at an appropriate time," Biden said in November. Today, seven months later, this not-so-veiled threat sounds particularly toothless. They had seven months to force OPEC to act. They couldn’t.

Now, it’s G7’s turn to try and exert pressure on a group that has clearly stated it is not interested in doing what anyone else tells them to do. There is no doubt in my mind that OPEC would welcome the G7 remarks, which implicitly suggest it has been acting irresponsibly. There is also no doubt it will do zero in response to these remarks because prices are right where OPEC wants them and U.S. shale is not going to ride out drills blazing and fill the gap.

Accusing someone of acting against your interests by telling them to act responsibly appears to be the go-to approach of the world’s leading economies and their international organs such as the IEA.

The goal seems to be making the target of these accusations feel ashamed and rectify their behaviour. Also, assigning a responsibility for your own energy security to an external party is such a convenient way to shirk your own responsibility for guaranteeing this security.

It is difficult to see any other point to that sort of behaviour. What is even more difficult, however, is accepting that those with the calls for responsible behaviour actually expect this tactic to work.

Someone with a more political focus might argue that this sort of attitude is a remnant from Europe’s colonial past when colonised peoples were viewed as quite childlike in their ignorance of the civilised ways, as it were. I would agree with such an argument but add it is not the only explanation.

G7 is the club of the most advanced economies in the world — the most advanced and the wealthiest, the economies that the rest of the world is supposed to look up to. To think that G7 — Canada, France, Germany, Italy, Japan, the United Kingdom and the United States —could be dependent on someone as backward (in economic diversification, that is, right?) as the Middle East oil kingdoms for its livelihood is an idea so unpalatable that it would never ever be voiced openly. It could only be voiced as a call on those oil kingdoms to “act in a responsible manner”.

UK’s economy surprised observers in March by shrinking, albeit modestly, as the cost-of-living crisis began to take its toll. The crisis, in case anyone has already conveniently forgotten, began last year as for some mysterious reason renewables appeared incapable of replacing fossil fuels completely.

This did not prevent the Ministry of Business, Energy and Industrial Strategy from saying that the country "has no issues with either gas or electricity supply, and the government is fully prepared for any scenario, even those that are extreme and very unlikely to pass".

"Thanks to a massive £90bn investment in renewable energy in the last decade, we have one of the most reliable and diverse energy systems in the world, and unlike Europe, we are not dependent on Russian energy imports," a spokesperson for the ministry said today, as quoted by Sky News, which is even cuter. It becomes cuter still if you recall how Boris Johnson went to Riyadh in March, quite urgently, and it was not to discuss the weather.

In Italy, Confindustria just warned that if Russia suspends gas exports to the country, the G7 economy would suffer a 2% hit both this year and next. "A halt of gas imports from Russia could have a very strong effect on the already weakened Italian economy," the industry group said.

Why weakened? Because of commodity prices. The Draghi government has already poured the equivalent of $36 billion into the economy to cushion the blow and will probably need to pour some more as commodity prices are not exactly going down. There are a lot of irresponsible players around, it seems.

Meanwhile Canada is also struggling with runaway inflation. The biggest producer of heavy oil is quite energy independent but its economy is intimately intertwined with that of its southern neighbour. If the U.S. suffers, so does Canada.

In fact, some analysts are forecasting a recession for Canada: "The reason why that outlook is the most likely to occur, is because … runaway inflation has always led and ended in significant recessions for the last 50 years,” according to one such analysts, former CIBC World Markets chief economist Jeff Rubin.

U.S. GDP shrank by 1.5% in the first quarter but April data showed an increase in consumer spending, which gave cause for optimism to many an analyst. For these analysts, an increase in consumer spending, which provides two-thirds of U.S. economic growth, is always good news and this is understandable.

Yet there’s one grim question hanging in the air: with fuel prices on an inexorable rise leading to higher prices for virtually everything, how long until Americans stop spending more? It’s a very scary question for an economy so dependent on consumer spending — more dependent on it than Saudi Arabia is on oil for its economic growth, by the way.

Inflation seems to be cooling off in the United States, which has prompted optimism and expectations for possibly more modest interest rate hikes. Based on oil prices, however, this optimism may turn out to be premature.

Germany’s economy expanded at a respectable 0.2% pace in the first quarter, disappointing those who expected a recession. Yet it is by no means out of the woods yet. Inflation is at an all-time high of 7.4% and expected to stay at 7% for the whole year, double last year’s level.

Germans are already curbing their spending, including on energy, in order to cope. Oh, and the German economy could take a hit of 12% if Russian gas supply stops abruptly, for example, I don’t know, if Germany does what the Ukraine wants it to do and shuts off Nord Stream 1.

France, the nuclear powerhouse of the European Union, is suffering from a combination of slow economic growth and high inflation because EU members, especially those in the eurozone, are extremely interdependent and if one suffers, they all suffer. France, then, is on the brink of the worst of the worst: stagflation. The government is already planning measures such as food vouchers and an increase in welfare payments to keep its notoriously short-fused citizens from revolting yet again.

Finally, Japan is so dependent on foreign energy that despite its general position on the war in the Ukraine, which is one of unequivocal condemnation of Russia, it has remained a member of the consortium pumping oil off the coast of Sakhalin Island and has stated bluntly that it cannot afford to leave.

Economic growth meanwhile is slowing, booking a contraction during the first quarter, prompting talk of stagflation for the world’s third-largest economy. Consumer spending, unlike the United States, has dropped as inflation creeps upwards.

G7 members are not doing terrifically well, then, and a big part of the reason for this, along with the lingering effects of pandemic lockdowns, is the direction of oil prices. Members’ own actions have of course contributed to this direction, which is an idea just as unpalatable as the idea that G7 could be uncomfortably dependent on the actions of other countries.

It is, in fact, so unpalatable that it has already produced the first truly farcical result: EC President Ursual von der Leyen told Mika Brzezinski last week that the EU sort of needs to continue buying Russian oil so that Russia couldn’t sell it on other markets for more money.

Yes, she said this, although I feel it necessary to note that she did not use those exact words, as one Twitter commentator pointed out. Of course she wouldn’t. Just like G7 energy ministers wouldn’t openly beg Saudi Arabia and the UAE for oil. They would instead call on them to act in a responsible manner.

I’ll leave you with a Birol quote from that IEA statement on recent gas developments from last September: “Recent increases in global natural gas prices are the result of multiple factors, and it is inaccurate and misleading to lay the responsibility at the door of the clean energy transition,” the head of the IEA said.

They like to talk about responsibility, these OECD leaders, don’t they? Oh, in the meantime, the Saudis and the Emiratis are warning that the world’s spare oil production capacity is dwindling because of underinvestment. Not a word from G7 on that. It’s not their responsibility, I imagine.

Image credit: Cristian Slav