EUROPE IS ALSO likely to suffer as a result of the barrage of economic sanctions it has fired Russia’s way in recent days — “but that’s a sacrifice the EU is willing to make”.
So said foreign affairs minister Simon Coveney earlier this week.
Sacrifices are certainly on the cards for European households after the latest Eurozone inflation figures were released yesterday.
Consumer prices across the single currency area surged by 5.8% in the year to the end of February, according to the date, up from a rate of 5.1% in January.
Persistently elevated energy prices — which trickle down to consumers in the form of higher household bills — were, once again, the main culprit behind the increase.
In fact, Eurozone energy prices had climbed by a whopping 31.7% in the year, up from an annual rate of 28.8% in January, according to Eurostat — the EU’s official statistics agency.
With Russia’s war in Ukraine in full flight, there appears to be no relief in sight from sky-high energy bills. In recent days, European gas and crude oil futures have hit multi-year highs amid heightened anxiety about the future of Russian energy exports to the continent.
So what is actually driving the ongoing volatility and how reliant is Ireland on Russian energy? And crucially, what does it all mean for Irish, European and global economies?
Why are oil futures spiking?
Speculation for the most part.
Russian energy exports have not been hit directly with Western sanctions nor have supplies dropped off much in recent weeks despite the conflict in Ukraine.
However, oil markets are pricing in the risks associated with the spiralling crisis in Eastern Europe.
Crucially, Europe and America are also trying to buy less oil directly from Russia, putting more pressure on supplies from alternative exporters like Norway and countries in the Middle East. This is driving up the price of oil from other petroleum-exporting countries.
Russian energy markets are also in a state of upheaval at the moment with ExxonMobil announcing plans to exit the country and oil major BP announcing its decision to offload its stake in Russian energy giant Rosneft.
There is also the possibility that Russia could curb exports in response to Western sanctions.
So there is a huge degree of uncertainty about the future of Russian oil exports at the moment and more demand for alternatives. Consequently, the price of a barrel of Brent crude oil — the main benchmark for the pricing of European oil — for delivery next month had jumped above $115 a barrel at the time of writing.
For context, the price hadn’t topped $100 since 2014 before this week.
Motorists and transport businesses — already reeling from sharp 29.5% and 32% increases in the price of petrol and diesel respectively in the year to the end of January — are likely to feel the knock-on effects over the coming weeks.
Speaking in the Dáil today, Tánaiste Leo Varadkar said the Government might have to look at reducing excise duty on petrol and diesel as prices hit €2 per litre on some forecourts today.
“We are more concerned about energy prices and everyone driving by the forecourt this morning will have seen the price of petrol the price of diesel at psychological €2 euros per litre being seen in some stations at the moment,” Varadkar told the Dáil.
“We’ve already seen increases in our gas bills and our electricity bills and unfortunately, because of the events in Ukraine, we’re likely to see further raises over the next couple of weeks. So Government will respond.”
And what about gas prices?
Well, they’re also in a state of flux.
Europe — which is reliant on Russia for about 40% of its gas — has seen benchmark wholesale gas prices skyrocket in recent days.
Like oil, the conflict in Ukraine hasn’t drastically curbed flows of gas from Russia to Europe or certainly not to any great extent. Analysts widely expect that Russia will keep sending gas to Europe via pipelines like Nord Stream and the Yamal Russia-Europe line.
But in general, Russia had been sending less gas to Europe in 2021 compared to 2020, leading to elevated wholesale prices.
Combine the fact that Germany last week postponed signing off on the crucial Nord Stream 2 pipeline from Ust-Lugha in Russia and you can see why market speculators are betting that there will be less supply in the near future.
Markets hate uncertainty. The possibility that flows could be cut short because of Russian government intervention or, say, because of damage to pipelines as a result of the conflict is also being factored in.
Ok, so how reliant on Russia is Ireland when it comes to gas?
For gas, not very reliant in a direct sense.
Natural gas is used for home heating but also about half of Ireland’s electricity is generated by gas-fired power stations.
But Ireland imports no natural gas directly from Russia.
About 27% of total Irish natural gas demand is met with supply from the Corrib gas field off the coast off Erris Head in Co Mayo, according to Gas Networks Ireland’s most recent calculations.
Strong swings in EU natural gas prices, with a strong increase over the last days. pic.twitter.com/ZRdpYhweEI
— Philipp Heimberger (@heimbergecon) March 3, 2022
The remaining 73% of natural gas demand is met with supply imported from the UK, specifically the Moffat Entry Point in Scotland.
In reality, Ireland is just an extension of the British wholesale gas market, explains Muireann Lynch, an energy economist and Senior Research Officer with the Economic and Social Research Institute.
“When [economists] model the Irish gas market, we don’t actually model it as a market. We model it as a node in the UK market. It is that stark,” she said.
So for all intents and purposes, we are part of the UK gas market, and therefore, our gas supply is one of the same as the UK gas supply with the exception of Corrib, which is small and declining.
And what about oil?
It’s difficult to get precise, up to date figures.
But Ireland imports all of the oil consumed within the economy — over 70% of it in the form of petrol and diesel, according to a 2020 report by the Sustainable Energy Authority of Ireland (SEAI).
As you can see from the table below, the vast bulk of Ireland’s imports of refined oil products in 2018 came from Britain.
You can also see from the table that Russia is a large individual supplier to Ireland. But it pales in comparison to the contribution made by Britain to Ireland’s oil supply.
There’s a degree of diversity there that isn’t present when looking at the Irish gas market.
“The UK supplies most of Ireland’s product imports but its share has declined from 93% in 2005 to 64% in 2018, partly because of refinery closures between 2009 and 2014,” the SEAI noted in the report.
“The diversity of supply in recent years reflects a well-supplied and increasingly competitive oil product market.”
So we’re relatively well protected from shocks?
Well, yes and no.
As Lynch said, there are really two issues around security when we talk about energy shocks: “physical security” and “price security”.
She explained, “Physical security is: Do we have the actual molecules of gas that we need?” Price security is: Okay, we might have all the gas we could ever want but what price are we paying for it?”
The same is true for oil.
Europe, as we’ve heard over and over again in recent weeks, imports about 40% of its natural gas and 27% of its oil from Russia.
At the same time, British gas supply — upon which Ireland relies for 73% of its gas supply — is relatively diverse, coming mostly from domestic production but also from Norway, the North Sea, parts of Europe and the Middle East.
Just 5% of it comes from Russia directly.
In Britain, “Russia is what is called ‘the marginal supplier’”, Lynch explained.
“That means if tomorrow, Britain wants one extra unit of gas, the way it generally washes out is Russia is supplying that one extra unit.”
In Europe, Russia has a much stronger influence on gas prices. “Really, prices are set by Russia,” Lynch said. Again, the same holds for European oil prices.
So because British gas supply is relatively diverse and because Ireland doesn’t import any oil directly from Russia, we probably won’t have a situation where pipelines and pumps run totally dry, Lynch said.
But it does mean prices are more likely to remain volatile and subject to upward pressure so long as the conflict continues and demand for gas and oil from alternative sources is heightened.
Of course, it could get worse if supply from Russia is directly affected or cut off altogether, Lynch said.
In the event that Russia does, turn off the pipelines, and there’s an actual physical security issue, then there are EU treaties in place — there are also treaties in place between Ireland and Britain that survived Brexit — which essentially mandate equal sharing of gas. So in the event that Russia turns off the pipe, we can’t just say: ‘Well, we get our gas from Great Britain via Norway so we’re all good and the Germans can just suffer.’ We actually have agreements in place to ensure that we do share equally.
“So even though we’re not directly connected to Russia, we are still affected; both on the price side and also on the physical supply side.”
What do higher energy prices mean for the Irish and global economies?
Well, higher home heating, energy and transport fuel prices were already the main contributors to roaring headline inflation figures before war broke out in Ukraine.
The fear now is that elevated wholesale prices — eventually feeding into higher bills and prices at the pump — could stick around for longer than expected or even intensify as a result of the conflict.
As a result, the International Monetary Fund (IMF) has downgraded its outlook for global recovery from the pandemic this year.
“Global bottlenecks across the supply chain, increases in energy and food prices and supply-demand mismatches are driving inflation to higher-than-expected levels across the G20,” the IMF said yesterday.
“Inflation drivers and impacts vary between countries and within countries. There is consistency in that the greatest impact will be felt by the most vulnerable households.”
But Ireland, a relatively wealthy country, is unlikely to feel the worst of the pain, Lynch explained.
“You could probably decrease access to energy in the United States or the European Union and it would result in higher costs, lower standards of living, but apart from that, everything would be fine, more or less,” she said.
Whereas if you restrict access to energy in areas that are rapidly developing, you actually kill people. Energy poverty is a serious problem in developing countries. If you don’t have access to heating, you can’t cook food, you can’t boil water. And children who don’t have access to lighting, they can’t get an education, and people can’t work.
“So when it comes to a global energy shortage, the implications are actually far more devastating in developing countries, and we tend to forget that.”
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