Energy Security, the IEA, and Russian Sanctions
Eva Schwartz | Jan 22, 2023
As sustainable and renewable energy has gained prominence in security policy throughout the past few decades, the International Energy Agency has found the need to expand its work to consider the future of energy security.
The International Energy Agency (IEA) was established in November 1974, following the 1973 oil collapse. Over the past 50 years the IEA has worked to promote policies concerning the affordability and reliability of energy. Though the IEA initially solely focused on oil, the need for alternative energy is pertinent, and their work has expanded to ensuring the security of all types of energy.
The IEA protects energy security through various measures, though their most influential and relevant policy focuses on the collective emergency response system. This system supports energy markets in times of crisis. Thankfully, the system has only been invoked five times since the IEA’s inception, though two of these instances have been in the past year as the Russia-Ukraine crisis has threatened global energy security.
Russia is one of the top three global providers of oil products; therefore, when Russia invaded Ukraine in February 2022, many countries quickly placed embargos on Russian-produced oil. The IEA enacted the emergency response system, and the 31 member states of the IEA worked together to support the global oil market. On the first of March 2022, 60 million barrels were released from emergency IEA stocks to support the collapsing oil market. By April 1st 2022, a record-breaking 120 million barrels were available from the IEA’s emergency reserves. Reserves are managed by a specialized agency that effectively releases and understands emergency energy security situations and consists of government-owned oil reserves and other emergency stocks.
Despite efforts and campaigns against using Russian-produced oil products, in October 2022 Russia’s daily oil exports were only 400 kb/d lower than pre-war levels. Though EU countries and the US have significantly decreased their reliance on Russian oil products, countries such as India, China, and Turkey have only increased their demand and dependence on Russian oil. Regions including Latin America have also increased their reliance on Russian oil as trade flows reconfigure themselves.
This dynamic has become particularly pertinent as China has relaxed its zero-COVID policies this winter. While China has seen a significant uptick in cases following a relaxation of COVID policies, it has also experienced a dramatic increase in demand for gasoline as the country begins to reopen, despite a weak economy and shaky family incomes. Chinese dependence on Russian oil will continue to grow and hold influence, particularily because of the upcoming EU oil sanctions and price caps.
Beginning February 5th, EU and G7 countries will sanction Russian liquified natural gas (LNG) and crude oil products, while also placing price caps on barrels of Russian oil. This ban includes imports of diesel, jet fuel, and other oil products into EU countries. The February's sanction only expands upon sanctions placed upon Russian seaborne oil products that was placed on December 5th, 2022 by G7 states. This ban involved imposing a $60/barrel price cap on Russian oil products, which prohibits shipping, insurance, and re-insurance of Russian crude oil unless the barrels sell for less than $60/b. As a result of these sanctions, a total of 2.1 mb/d of Russian oil products previously ordered by the EU will no longer be in demand, leaving Russian reserves with significantly more product than usual. Additionally, the IEA predicts that total Russian LNG output will fall by 1.4 mb/d in 2023 due to the coupling of the February and December sanctions.
Financially, due to the upcoming sanctions, Russia may be in even more trouble. In January 2022, before the conflict began, 45% of the total Russian federal budget was sourced from oil and gas-related taxes, as well as export tariffs for oil and gas. With much of the country’s demand absent, their treasury may be in trouble. Furthermore, Russian LNG to the EU resulted in USD 400 million on average per day. This revenue stream will all but disappear this spring.
As February 5th looms closer, all 27 member states of the EU are required to hold 60 days or more of refined product inventories while they simultaneously work to research and develop new, sustainable forms of energy. Due to this embargo, countries such as Kuwait and Nigeria have already begun planning expansions in their oil production capabilities. Trade flows will see significant shifts and changes in 2023 as EU refiners that previously sourced crude oil from Russia have already begun sourcing from Norway, the United States, Saudi Arabia, Guyana, and Azerbaijan.
Despite extensive attention and research on sanctions and price caps in energy security, some experts are hesitant. Experts are unsure how the price cap will work for final-product refined fuels because capping final-product oil prices is much more complicated than setting price caps on crude oil due to the nature of import-export calculations. Furthermore, the price of oil products often depends on where they are bought, rather than where they are produced due to the constant presence of intermediaries in oil production. Additionally, there will likely be an exception for imports of crude oil by pipeline into EU member states that have a specific geographic dependence on Russian oil, such as Slovakia.
Though the establishment of the IEA was due to the 1973 oil collapse, it is clear that their influence carries on and supports energy security. 2023 will be a decisive year for the IEA and global energy security as the impacts of the February 5th sanctions and price caps come to fruition.