Putin’s energy power play

This is an audio transcript of the Rachman Review podcast episode: Putin’s energy power play

Gideon Rachman
Hello and welcome to the Rachman Review. I’m Gideon Rachman, chief foreign affairs commentator of the Financial Times. In this week’s edition, we’re looking at how the battle for energy, oil and gas is driving world politics since Russia’s invasion of Ukraine. My guest is the perfect guide to the connections between political power and energy. Dan Yergin is one of those academics who really is consulted by presidents and prime ministers because of his expertise on global energy markets. He recently set out the connections between energy, climate change and political power in a book called The New Map. So, how will energy sanctions on Russia change the global balance of power?

When Russia invaded Ukraine, Europe was brought face to face with its dependence on Russian oil and gas. The Europeans are now struggling to free themselves from that dependency, and that has huge implications for the future of Russia and Europe, as well as the countries that are poised to become even more important as suppliers of energy: the United States, Saudi Arabia, Nigeria and others. The EU has now passed six separate packages of sanctions aimed at Russia. The latest set focused on Russian oil. Ursula von der Leyen, the president of the European Commission, announced the new measures.

Ursula von der Leyen
This is very important. Thanks to this, Council should now be able to finalise a ban on almost 90 per cent of all Russian oil imports by the end of the year.

Gideon Rachman
But pushing through energy sanctions on Russia has consequences for the West. Inflation is already rising. The price of gas, petrol, has always been a very sensitive political issue in America and indeed Europe. And gas prices are going up.

News clip
Gas prices have hit another record high this week, the national average now at $4.76 a gallon.

News clip
Another day, another petrol price record. It now costs over £95 to fill an average tank with unleaded, over a hundred to fill it with diesel.

Gideon Rachman
But if the implications of energy sanctions on Russia are difficult for the west, they’re potentially catastrophic for Russia itself. As Dan Yergin explained to me, he believes that Russia’s days as an energy superpower are now coming to a close.

Dan Yergin
Putin once said that he didn’t like the term energy superpower because it’s suggested it was too cold war-ish. But I think it’s going to end because what he’s basically done is in the process of destroying his most important baseload market, which is Europe. So he’s going to continue to be a important producer of oil and natural gas, but it’s not going to bring the same kind of political clout, and ultimately it’s not going to bring the same revenues.

Gideon Rachman
But that’s based on the assumption that Europe is serious about weaning itself off Russian gas.

Dan Yergin
Right now, probably Russia, at annualised rates, is earning $250—300bn a year from selling oil and gas to Europe. I mean, this is one of those dividing lines. For the most part, European nations are just not wanting to be dependent on Russian energy in the future. It’s going to be hard with oil, it’s going to be harder with oil products like diesel and very hard with natural gas. But I think it really is a turning away and people are not going to wake up the day after tomorrow and say, well, it’s OK, let’s go back to it.

Gideon Rachman
But can they do it? I mean, you know, Germany, for example, the biggest economy in the EU, which I think they now recognise, made themselves dangerously dependent on Russia. Some people still say, oh well, you know, when it goes quiet the Germans will go back to trading with Russia as before. Do you see signs that the Germans are serious about weaning themselves off?

Dan Yergin
I think they’re taking steps to really do it. Obviously, all the countries are going to have to deal with the economic costs and turmoil. And I think although Putin made a series of major miscalculations, they were all rational miscalculations. One of his miscalculations was that Europe was so dependent on Russian energy that the Europeans would simply, it’d be like Crimea part two. They’d say, fine, this is terrible, but go on. But I think in particular, Germany has decided it was really a strategic mistake. Now, I think Putin’s bet or is still his calculation, is that ultimately the economic turmoil would be such that the Marine Le Pens will triumph, that the economic turmoil will undermine the western unity. And that’s what will be tested over the next several months.

Gideon Rachman
Yeah. I mean, you’ve written as well that Putin is somebody who studies the energy market really quite carefully, that he knew it well.

Dan Yergin
Yeah, he wrote his PhD sort of quasi on the energy markets. And I mean, I’ve heard him talk about energy markets and CEOs who dealt with him has said, often feel we’re dealing with not just the president of a country, but CEO of Russian Energy Inc, that he really pays close attention to it and has always regarded it as one of the foundations of his political strength.

Gideon Rachman
And I don’t know whether it was you or a friend of yours who saw him talking about shale gas, the American sort of alternative, and being very threatened by Mr Putin.

Dan Yergin
No, that was me. I wrote about it in The New Map. I wrote about it in the third person. It was just a decision not to use the word I anywhere in the book, but a lot of what’s in The New Map is what I personally experienced. And basically, that story is that, this was that big St Petersburg International Economic Forum, their version of Davos. He’s there with Chancellor Merkel in the platform. They tell me, oh, you get to ask the first question. So I asked them the normal question.

Gideon Rachman
What year was this?

Dan Yergin
This was 2013. The normal question, which is what are you going to do to diversify your economy so you’re not so dependent on oil and gas, but I accidentally, I mentioned the word shale. And he interrupted, started shouting, he said, shale is barbaric, it’s terrible, it poisons people. And it went on and on. And he knew what he was talking about. He didn’t like shale because he thought that shale gas and ultimately American shale gas would compete with his gas, which was the case. And secondly, he recognised the development of shale would change the position of the US in the world and give the US a flexibility in foreign policy it didn’t have before, augment US influence in the world. And from his point of view, he was right. And what’s happening today, US LNG, natural gas, liquefied natural gas, is competing with Russian gas in Europe and Europe is now regarding US LNG as a strategic asset for Europe as they try and divorce themselves from Russian gas.

Gideon Rachman
So as . . . I was going to ask you for a bit more detail on how Germany is going to do this and the rest of the European Union and a big part of the solution, you’re saying, is going to be liquefied natural gas from America?

Dan Yergin
 . . . America, and, you know, like in January, the US was providing more gas to Europe than Russian gas. But at that point, Russia was doing something very strange. It was pulling back its volumes to Europe. And some think that this was deliberate in anticipation as part of a, economic warfare to prepare for the invasion of Ukraine.

Gideon Rachman
Yeah, I remember talking to some members of the new government in Germany around that time, we said, we came in and we looked at our gas reserves. I said, “What’s going on here?” You know, the reserves are like half what they should be. And that was because Russia wasn’t supplying.

Dan Yergin
Yeah. Russia was just providing its minimum contractual. And what that was doing was forcing the gas price up, which was beneficial to Russia. And it was also, in a sense, meaning that Germany and Europe was not as well supplied as it had been. But, you know, it shouldn’t be overstated. US LNG is part of the mix. It’s also LNG from elsewhere. It’s whether the Dutch decide to bring more gas on from the huge Groningen field, which has been mostly shut down.

Gideon Rachman
Why did the Dutch shut down? It sounds like such a great asset to have.

Dan Yergin
Well, it is, made the Netherlands a very rich country, among other things. But there have been tremors, small earthquakes that have damaged people’s houses and a lot of distress about that. And so, in response to the pressure, Groningen is not a heavily populated area where the gas is, but in response to that, the government has been bringing it down with the aim of bringing it down to zero. But they have retained the ability to bring it back up again in an emergency, and to a lot of people, this looks like an emergency.

Gideon Rachman
Right. So, broadly speaking then, you think that with a lot of difficulty in boxing and coxing, Europe will be able to wean itself off Russian energy over the course of the next year or so, or largely?

Dan Yergin
Well, I think it’s more like a two-year process. So the thing that I should say they’re most confident about is what’s called crude oil. Even there, there’s some questions we can come back to. Right now, there’s a real shortage of diesel product and you see the petrol stations, gasoline stations. That’s a real problem and that’s showing up at the gasoline pump. And then natural gas is the one that will take the longest because it’s not flexible, because big part of it’s based on pipelines and you can’t take a pipeline and put it on a tanker and move it somewhere else. So that’s the one that’s most challenging and that’s the one that’s particularly critical importance to German industry right now.

Gideon Rachman
And how do you think they’ll get around it?

Dan Yergin
With difficulty. I mean, I think it’s a process. It depends. Is it a cold winter or not? A lot depends on the weather. I think this will give a further boost to renewable generation of electricity. So using less gas to help generate electricity. And Germany is kind of looking at its strategic mistakes in retrospect. And one strategic mistake was the speed with which it shut down its nuclear power.

Gideon Rachman
Hmm. You referred to The New Map, your book, I mean, I think in the book you actually wrote, there will be a big confrontation over Ukraine. Why did you see that coming from an energy perspective?

Dan Yergin
Well, it was, it was from a geopolitical perspective . . . 

Gideon Rachman
Right.

Dan Yergin
. . . because you remember, my first book was in the origins of the cold war. And I started to think in my writing about the origins of the new cold war, which I hadn’t ever expected to be doing again. And I’d always been very interested in Russia’s relations, the Soviet Union relations with the west. And I remember some of the reviewers of the book said, why is he spending so much time on geopolitics? But it seemed to me basically, I said in The New Map that Ukraine was the issue that was going to blow up between Russia and the west, because basically it was that Putin had made clear again and again that he did not accept the post-cold war settlement. He did not accept that these states would now be independent countries. And in particular, he had been saying for years that Ukraine was not a country. I mean, he said it publicly again and again. And you could just see the tension building up. And a lot of the battles were about natural gas, but it was really about the sovereignty of Ukraine.

Gideon Rachman
Yeah. I mean, this is a slight diversion, but I’m interested to know what you think. So where does that put you on this debate that’s currently broken out about, should we make concessions to Russia? I mean Putin has said this again and again. He’ll never accept Ukraine as an independent state. Some say, well, you know, we just got to force him back. Others like Henry Kissinger are saying, you know, we’ve got to give him something. What do you think?

Dan Yergin
I think that’s a really tough question because their war aims are contradictory. I didn’t know that Kissinger has said that. Did he, by the way, say what they should give him?

Gideon Rachman
Territory. He said a little bit of Ukraine.

Dan Yergin
Yeah. Well, I think it would be very tough for a Ukrainian government to survive at this point if it did that. Ultimately, that a settlement would be redrawing once again, it’d be a new map. I think the biggest issue and the one that might be, quote, the existential issue for Putin would be Crimea. And so that’s why it’s hard to see what the path out of there is. The other thing that is quite concerning about this, there is less contact between Washington and Moscow today than there was during the Cuban missile crisis. In the Cuban missile crisis, you had the ambassador to Washington who was talking to Bobby Kennedy. Here, actually, Henry Kissinger. People said, who’s the backchannel to Putin? It’s Henry Kissinger . . .

Gideon Rachman
He’s 99.

Dan Yergin
He’s 99 years old and he’s kind of out of that business. But who could talk to him? And, you know, I think people who have dealt with Putin over the years say that, you know, he’s changed in the last two years. And you wonder if he’d been meeting with all the types who come to Davos, international businessmen, diplomats over these last two years, would he have done something this reckless and this misinformed? I mean, misinformed about his own army, misinformed about what the nature of Ukrainian response would be. I should say that this once again just shows how you see these broad trends but what actually happens in history is contingent.

Gideon Rachman
Yeah, and contingent on individuals. As somebody who did history rather than political science, it always seemed to me that political scientists slightly write the individual out of their theories, which is a bit of a mistake.

Dan Yergin
Yeah. I mean, if Zelensky had left Ukraine on a flight out, it would be a whole different story. So I think at the end of the day, individuals matter. I mean, even though I could see in, you know, that’s why I spent that time in The New Map explaining and people have said to me, now I have the context for how this came about, because it didn’t happen yesterday, but it’s been building up for decades. It still came down to individuals who still had to pull a trigger.

Gideon Rachman
So it’s a combination of the structural stuff that you see and the individual. You can’t think one or the other out.

Dan Yergin
Yeah.

Gideon Rachman
But getting back to the energy picture, broadly speaking, we think Europe will be able to wean itself off and when that happens, Russia really is in trouble, isn’t it?

Dan Yergin
Yeah. Right now, when it comes to gas, Russia has the upper hand. But two years from now, if Europe has largely weaned itself off or gone farther, divorced itself from Russian gas, then Putin has a problem because he has a stranded asset. He then can’t move the pipelines.

Gideon Rachman
Because pipelines take a long time to build.

Dan Yergin
Yeah.

Gideon Rachman
So he can’t just say, OK, I’ll send it to China, because the pipeline’s not there.

Dan Yergin
Yeah, exactly. So he said for years that our real market is in Asia. The only way he finally got that Power of Siberia pipeline made was after he annexed Crimea. He met Xi in Shanghai and the Chinese drove a really tough bargain, forced the price down, but they built a pipeline, the Power of Siberia. And they’ll build another pipeline, but it will take not three years, I think. It’ll probably take five years, it has to pass through Mongolia, even with Chinese skills at it. And the Chinese will drive the price down and that again will only take some of this gas. So, you know, you don’t want to totally alienate your most important market, but that’s what he’s done with Russian gas and that story is not going to be rewritten. People are not going to say, oh, well, let’s go back. You know, ultimately they may be buying some Russian gas, but not with the degree of dependence that’s existed up till now. And remember, just one other thing, it’s not all of European gas. It’s 35 per cent of European gas. But for some countries like Germany, it’s a much larger share.

Gideon Rachman
Yeah. Turning then to the other countries in the global energy system and how that connects to geopolitics, I mean, one of the points you make is that just as Russia may lose its status as an energy superpower, America now is an energy superpower, partly because of this thing that Putin hates — shale gas.

Dan Yergin
Right, yes. Yeah, well, very much because of shale. I mean, the US went from importing 60 per cent of its oil in 2008 to being energy-independent in terms of oil, and this year it will be the world’s largest exporter of LNG. So it’s something that has been economically very significant for the United States. It’s drawn, you know, a lot of investment actually from other countries into the United States. And it now turns out that it is indeed a strategic asset as well. So you have the Biden administration, Joe Biden of all people, promising Europe 15 per cent more LNG. So, you know, it takes sometimes time for thinking to catch up with the new reality.

Gideon Rachman
People, I don’t think, you know, really have clocked that. They think of the energy superpowers as Saudi Arabia, Russia. But now the US is the world’s largest producer of LNG and one of its largest producers of oil.

Dan Yergin
Well, actually, let’s clarify that. It is the world’s largest producer of oil today, considerably bigger than any other country, and it is the world’s largest overall producer of natural gas, and this year it will be the largest producer of LNG. Now Qatar is going to build new LNG facilities and will overtake the US again, but it is a huge turnround and I’ve always found other countries recognise it more than actually it’s recognised the United States.

Gideon Rachman
Yeah. And I mean you’ve always been somebody who’s explained to the world really how closely connected energy and geopolitical power are.

Dan Yergin
By the way, Gideon, we’re in one of those times again where suddenly it’s centre stage again. People forget it and then you just see how interwoven it is. And of course, much of Putin’s power, much of his resurgent Russia, the 22 years of economic progress under his leadership, which he’s now thrown away anyway, was based on oil and gas revenues.

Gideon Rachman
Mmm. Now, if I was a conspiracy theorist, I would say, aha, so America maybe is not just fighting for freedom in Ukraine or trying to support freedom, but they have this sort of big power political interest that, you know, Russian power is hugely eroded by this and American power is expanded because of their role as the new energy superpower. I don’t actually think that’s what . . . 

Dan Yergin
I was going to say, that you are much more rational. I mean, that’s not the way the American political system is and the Biden administration did not come into office thinking about that. I remember there was that theory a long time ago that the US deliberately brought down the price of oil in the 1980s after Ronald Reagan to destroy the Soviet Union and I asked George Shultz, who had been secretary of state. I said, “What do you think of that theory?” Shultz would say, pretty good theory, but he would say, we’re nowhere co-ordinated enough to be able to possibly pull off something like that.

Gideon Rachman
Yeah. Nonetheless, they found themselves with this new tool, which is kind of interesting in an era when we very much got used to the idea of American decline as a, as a secular trend. How important is this tool in fending off that secular trend?

Dan Yergin
I think it’s very important. I mean, I could see in India that the fact that the US exporting oil and gas to India has been one of the foundations of a much stronger, more positive relationship between the US and India. I can see with the Japanese, with the Koreans, it’s important. And you know who else is an important importer of energy from the United States? China.

Gideon Rachman
Really? So let’s get to the position of the Chinese, because, I mean, one of their big weaknesses as a power is a lack of natural resources.

Dan Yergin
Yeah.

Gideon Rachman
They have lots of them, but they don’t have natural energy.

Dan Yergin
They would love to have the position the United States has. One of the reasons I focused in The New Map so much on the South China Sea as I focused on Ukraine, is that you could see that the South China Sea, in addition to Taiwan, is an area where you could have a great power conflict. And for the Chinese, one of their big worries is that the US, if there was a confrontation, would interdict the supplies of imported oil that they depend upon.

Gideon Rachman
Now, obviously, the war in Ukraine has all sorts of issues it raises for China, but is energy also one?

Dan Yergin
Yes, I think the other thing, remember the Chinese set up an institute to study why Gorbachev failed and the Soviet Union collapsed? I think that they are going to be very busy studying these sanctions on Russia, the degree to which they might be applied to China. But of course, it’s a very different situation because as it turned out, Russia’s more integrated into the world economy than people recognise. But the integration of China and the United States is so great. I mean, these kind of massive sanctions that had never been done before, they’d be very different circumstance with China. But the Chinese are paying very close attention to that, clearly on the energy side and also, you know, they’re asking the questions, why has the Russian army performed so badly?

Gideon Rachman
Yeah. And what about the traditional oil producers? I mean, the FT ran a story saying that Aramco, once again, the biggest company in the world, their chief executive is saying, you know what, maybe we need to rethink this idea that the world needs to wean itself off oil and gas. It’s still incredibly important. Will they see an opportunity there and are they right?

Dan Yergin
Well, I think, what it is that surprised people coming out of Covid was the degree to which oil demand shot up. And if you are thinking about energy transition in The New Map, it’s that probably world oil demand continues to grow for about another decade or so. And I think Saudi Arabia, Saudi Aramco is looking at investment being pulled back elsewhere and saying this is a market opportunity for Saudi Arabia. And they’re spending billions to expand their production capacity and given how tight the world oil market is today, I would say that there’s certainly going to be a need for additional supply. I mean, this is an oil market that’s on edge. It’s on a precipice.

Gideon Rachman
Mm-hmm. And of course, I can hear all the climate-conscious people, most of us in that camp now, groaning slightly and thinking, oh, no. You know, one consequence of this is that efforts to speed the energy transition away from fossil fuels are now going through . . .

Dan Yergin
(Interrupting) Well, I don’t think it’s . . . The way I see it is, the direction is clear in terms of towards low carbon. The timing, you know, 2030, 2050, no one really knows. I mean, one of the things that we’re looking at very carefully is how much copper do you need to meet the goals for 2030 and 2050? And there’s a huge gap there so . . . 

Gideon Rachman
Copper for batteries, is that?

Dan Yergin
Batteries, everything. An electric car uses two and a half to three times more copper than an internal combustion car. One of the big themes in The New Map, again, as you know, kind of looking to trends in the future is we’ll go from, over time, from this world of Big Oil to a world of big shovels because of the amount of mining that’s going to be necessary. Wind and sun are free but actually, you need an enormous amount of metals to move to a net-zero world. And so that means mines, and there’s controversy about mines. But in answer to your question, I think that just the reality, in developing world, I think, where about 80 per cent of the world’s people live, they have different priorities and it’s going to grow. And, you know, oil is used for a lot of different other things. We’ve calculated that about 70 per cent of the cost of food is actually energy, not just fertiliser, but transportation, running tractors, processing. So this food crisis we have and the energy crisis are not two separate crises. They’re really interconnected.

Gideon Rachman
In the short term, however, Europe is burning a lot more coal because of the Russian crisis.

Dan Yergin
Yeah, coal consumption is way up and the question of energy transition, I did something very bold and you as a historian will know that sometimes as a historian you have to make judgments. And the judgment I made is that the energy transition started in January 1709 when an English metalworker figured out you could make better iron using coal rather than wood. But all these transitions unfolded a very long period of time and you still kept using the previous, I mean, oil overtook coal in the 1960s as the world’s number one energy source, and probably today the world is using three, maybe almost three and a half, four times as much coal as it did in the 1960s. So this kind of energy transition has never happened before. And right now people ask the question, I think what’s happening will speed the energy transition in terms of renewables. But there’s also the need to continue to provide energy to keep the world running and keep people supplied. And if we run into a very tight situation over the summer or the winter, it feeds into inflation, which is very destabilising, feeds into high food prices, which is very destabilising. And it feeds into politics in a very destabilising way.

Gideon Rachman
Yeah. I mean, as you say, you’re a historian, so let me end with a historical question. Where does this current global energy crunch fit historically? Do you think it’s one of the biggest we’ve had really since the 1970s?

Dan Yergin
Yeah, the 1970s is really a metaphor at this point for a really big energy crisis that shakes the world economy. I don’t think we’re there yet but . . . 

Gideon Rachman
Back then that was also a war, wasn’t it? Was the Arab-Israeli war . . . 

Dan Yergin
The Arab-Israeli war. And there were differences but there were two things. One similarity to where we were now, we went into the Ukraine war with energy markets already tight. In fact, I would say a real global energy crisis actually began last autumn when prices shot up in Europe and Asia. And so we had these very tight markets. The other similarity to that earlier period is the world after the crises of the 1970s was different than the world before, and the world after this crisis is going to be different. I think we’re at the end of a 30-year period that came with the collapse of the Soviet Union. It was an era of open markets, globalisation, easy travel, and it’s eroded over time for a number of different reasons. And now we’re back into a more divided world. I think that the western world has slammed the door on Russia. Not true in the developing world by any means, not true, obviously, for China. And I think Russia in this new world becomes the economic dependency of China providing raw materials. So it’s a different world. And this kind of notion of global markets and the playbook of globalisation is over. So I think it’s going to be a more fragmented world and one in which, the terms I used in The New Map, I said kind of we had this WTO consensus notion that everybody, China and United States were in the same boat, open world economy — that’s over. And we’re now in an era of great power, competition, strategic rivalry. It’s obviously taken on a whole new dimension with this war. And I think any student of history will say that’s a more dangerous phase of history to be in.

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Gideon Rachman
That was Dan Yergin, author of The New Map, ending this edition of the show. I’ll be back next week, so please join me again for another edition of the Rachman Review.

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