The military outcome of the Ukraine war is highly uncertain but the economic and political consequences of the Russian invasion of a country on the eastern borders of the EU are becoming more apparent.
The short-term effects of the war have been amplified in practically all commodity markets. The pandemic had already severely affected the global supply chains of most traded goods. The war has now created concern, if not outright panic, among vulnerable consumers.
Oil and gas are the essential lubricants of all modern economies. Western economies, especially in the US and the EU, have for too long taken for granted a seemingly endless supply of fossil fuels to support their citizens’ energy-hungry lifestyles and business models.
A lot of it comes from Russia: about two-fifths of Europe’s gas and a quarter of its imported crude oil.
On another front, over the last two or three decades there has been no shortage of political debate on how the world’s ever-increasing consumption of coal, oil and gas is having an alarmingly detrimental effect on the climate. Yet, many countries keep pushing the can down the road, fearing that the cost of investing in cleaner energy from reliable, renewable sources is too high.
The Ukraine war has now shaken the US and the EU, in particular, out of their complacency. They are now wide awake to the urgent need to formulate adequate energy strategies. The war is driving a change in mindset towards obtaining energy supplies from sustainable sources in the long term and from politically reliable regions in the short and medium-term.
Understandably, the immediate political and social priority is to shield vulnerable consumers from the shock of rising electricity and fuel prices that also create inflationary pressures on most necessities.
Countries like Spain and Italy that link the cost of electricity and fuel to commodity spot market prices have absorbed part of the cost to consumers through partial subsidies. Other countries, including Malta, absorbed most of the increase in cost through fiscal measures. Some may argue that this tactic could breach the EU state aid rules for industry, especially if extended for too long.
Political leaders in the US and the EU face the challenge of how best to mitigate the short-term impact of the war on consumer prices and guarantee required energy supplies to households.
In this scenario, they risk abandoning their commitment to invest more in renewable energy as they try to cut the umbilical cord that links them to energy supply from Russia, which is no longer considered a politically reliable neighbour.
Spanish Prime Minister Pedro Sanchez, in a recent interview with the Financial Times, appealed to EU leaders to act with unprecedented speed to redefine the energy policy, which must go beyond the interests of any specific member state.
Sanchez said: “If the EU does not give us tools to respond to this energy emergency, it will be difficult for not just Spain but for all member states to bear the enormous economic costs.”
It is not just political leaders that need to review their economic models to make them more sustainable in today’s global realities. The war in Ukraine has disrupted millions of lives and is also challenging business models of energy-reliant businesses.
Today, the US and the EU need steely political and business leaders to slash their dependence on energy supplies from both environmentally unsustainable and politically unreliable sources.