Vladimir Putin’s invasion of Ukraine has sparked global sanctions against Russia with potentially far-reaching economic implications for his country, but the crisis has also renewed focus on the critical importance of energy security, according to a Western University expert.
“Russia’s actions put our attention back to energy security, an issue that has re-emerged very quickly,” said Brandon Schaufele, professor of business, economics and public policy at the Ivey Business School. “If we think about what’s happening in the natural gas market in Europe, prior to Russia’s action, the prices have been much higher recently than over other years. This puts a strain on both the economy and on the budgets of lower-income households.”
The International Energy Agency defines energy security as the uninterrupted availability of energy sources at an affordable price.
Russia is one of the largest oil producers in the world, and is the largest supplier of natural gas, crude oil and solid fossil fuel (mostly coal) to the European Union, according to Eurostat. About 40 per cent of Europe’s natural gas consumption is from Russia. In North America, Russian oil plays a much lesser role in the energy market, but an important one, nonetheless. It accounted for seven per cent of U.S. oil imports in 2021, and three per cent of Canada’s crude oil imports in 2019.
Even before Russia’s unprovoked attack on Ukraine last week, prices at the gas pump have already been on the rise over the past several months.
Schaufele explained while it may have caused gas prices to tick even higher, the crisis in Ukraine is not the main driver for the unprecedented increase in gas prices, but rather a result of a continuing trend to scale back production among oil producers. This is mainly driven by increasing capital discipline among oil producers to produce less at a lower cost to get high returns, as well as the inevitability of a growing shift away from hydrocarbon toward more sustainable energy sources.
“There’s going to be a lot of uncertainty in the market because it’s unclear to what extent Russia is going to push into Ukraine and what the repercussions are going to be. That being said, one of the reasons the price of oil has ticked up over the last few months is that the markets are much tighter than they have been.”
The trend in rising oil prices and now the severe economic sanctions against Russia that many caution might push Putin to shut off Russia’s oil and gas pipelines that supply the world, may be causing another global rethink about energy security, Schaufele said.
“A large share of Europe’s gas supply comes from Russia, so it probably does not have the ability to find new supply in the very short run,” he said. Energy security is about diversity in supply and giving nations the ability to easily and quickly substitute one supply for another – substituting gas-fired energy for renewable energy, for example, and vice-versa.
“In a perfect world, energy security means we shouldn’t have to worry about not getting gas, you shouldn’t have to worry about paying twice for your hydro bill next month. In a perfect world, the energy sector is boring. And what Russia and the experience in Europe have done is it’s demonstrated that it’s tough for the energy sector to be boring,” Schaufele said.
The quest for energy security also makes a strong business case not just for renewable energy sources, but for other sources like nuclear, he added.
While there is no telling at this point what the potential consequences of the crisis in Europe to Canada’s global trade will be, Geoffrey Wood, DanCap Private Equity Chair in the DAN Department of Management & Organizational Studies, said the impacts are likely going to be significant in two Canadian sectors: aerospace and automotive.
Montreal-based aircraft manufacturer Bombardier holds about 30 per cent of Russia’s business jet market, which may be cause for concern for the Canadian aerospace giant, said Wood.
“The aerospace industry is a very, very competitive one. And it’s pretty much a ‘boom and bust’ industry. (The Ukraine crisis) is very worrying for Bombardier,” said Wood.
Between five and six per cent of Bombardier’s $6.1 billion annual revenue is from Russian clients, its CEO Eric Martel told a video conference with reporters last week. He said his company will not be engaging in business with sanctioned individuals or entities in Russia.
Last week, Prime Minister Justin Trudeau announced a series of economic sanctions against Russia in response to its attack on Ukraine. Canada has also prohibited all Canadian financial institutions from engaging in any transaction with the Russian Central Bank.
Wood said Canada’s platinum imports – an important raw material for the automotive industry – also stands to be significantly affected by the sanctions.
“This may weaken or cause disruption on the relative advantage of Canadian producers,” Wood said. Platinum is largely used for catalytic converters, an exhaust emission control device commonly used in automobiles, but is also used on electric generators and other heavy equipment.
If the Canadian automotive industry and its suppliers suffer a shortage of key materials, while their competitors in the region do not, then it becomes an issue, Wood explained. This is especially challenging given the automotive industry is already facing difficulty with the ongoing shortage of microchips.
“It’s more worrying for Canadian companies reliant on platinum for industrial purposes, compared to the position of their competitors,” Wood said.
In combination, platinum along with crude oil and refined petroleum make up 60 per cent of Russia’s total exports to Canada. Even though Canada produces and exports these products as well, commitments to overseas customers cannot be cancelled to meet emerging domestic needs, Wood said.