Ukraine Crisis: Fuelling Global Energy Insecurity
- Raghav Dalmia
- Sep 3, 2024
- 4 min read
Russia, also known as one of the strongest superpowers, with a military spending of $363.7 billion is a country that waged war in the name of a special military operation on Ukraine. While this war gained pace in the recent past, it has been building up since 2014, when Russia annexed Crimea, which was followed by a war in the Donbas region. Post the annexation of Crimea, Vladimir Putin presented the world with a speech, known as "manifesto of greater-Russia irredentism." In a speech that explained their ideologies, Vladimir Putin, stated that he wanted to "Build USSR again," stating that he tried to reclaim the historical territory that previously belonged to the USSR. He also added that he would "Protect" the Russian-speaking population and to conclude, he stated that he wanted to reverse the fall of the USSR. The speech was very significant as it allowed the global powers to know and understand what the Russian Federation was willing to do and what was its ultimate goal. Vladimir Putin stayed true to his words when he started a full-blown invasion of Ukraine. He backed the invasion with a reason, stating "Any former soviet member should not be a part of NATO and that NATO as a whole should stop operations in Eastern Europe because they follow an aggressive fire line, causing a threat to Russia's sovereignty and they would do anything to protect it." These claims were more of a warning to the world, letting the former Soviet countries and the other superpowers know what might Russia do in the future.
Teleporting to 2022, Russia held a full-scale invasion in Ukraine, backing it with the multiple reasons Ukraine was governed by neo-Nazis persecuting the Russian minority, and said that Russia's goal was to "demilitarise and denazify" Ukraine. Another reason for the Russian Federation to conduct this action was because Ukraine wanted to join NATO (North Atlantic Treaty Organisation) and as per Russia, it challenged their sovereignty. However, these actions lead to certain repercussions for Russia such as sanctions and embargos from major trade partners and other major countries. Moving forward to the year 2024, recent news suggests that the tables have turned, Ukraine has captured over 350km2 of a Russian territory called Kursk Oblast. Focusing upon the current situation (2024), Ukraine has showcased what it held in its sleeves, Ukraine captured about 3000 sq km of the Krusk region, one of the biggest attacks on Russia done by Ukraine after the invasion. They also while also attacking an oil depot using drones in the Rostov region of Russia.
While this is about the war, let's further dissect the topic and delve into the economic implications of this war. To begin with Russia, the country's economy vastly depended upon the trade of oil and natural gas, after the war, they were a significant amount of decrease in the exports by Russia as the firms in the country were not in a situation to produce and export oil and natural gas. Moreover, sanctions that were placed on Russia included "ban on provisions of technology for oil and gas exports and ban on provisions of credits to Russian oil companies and state banks, while these were not the only sanctions placed on Russia, the above mentioned ones were the sanctions that majorly impacted the oil trade. As per economics, this was a sudden shock to the firms producing natural gasses and exporting the goods, to add on to the disparity, many countries and private players reduced, or even cancelled trade with private firms of Russia. The effect that it had on the market supply was that the supply curve shifted leftwards as the sudden shock (the war and the sanctions) acted as a non-price determinant for the supply curve. This shifted the equilibrium higher, meaning the prices of goods significantly increased. For example if one would have received 100 barrels of petrol at $200,000,000 before the war, post the war, the 100 barrels of petrol will probably cost $400,000,000 (these figures are not applicable in real life and are just used to explain the point better). There were two major impact of the surge of oil and gas. Firstly, referring to figure 1.0, the equilibrium of oil and gas was at point A.
(What is equilibrium? As per definition, equilibrium is the point where the demand equals supply, where the firms supply exactly how much is demanded. Moreover, it is the point where social surplus is maximum, social surplus if the total benefit gained by the consumer and the producer. Adding on, this is also the point where the marginal benefit equals the marginal cost. Marginal benefit is the additional satisfaction (utility in economics) gained by the consumer while consuming one additional unit of the good, and marginal cost showcases the additional cost that the firms/producers have to bare in order to produce one additional unit of the good. So at the equilibrium point, the extra satisfaction of consuming the additional unit of the good equals the additional cost of producing the additional unit of the same. )
The graph of S1 shifts leftwards due to the shocks experienced by the Russian firms as mentioned above, including attacks and sanctions. As they are a non-price determinant, they allow the graph to shift. When S1 shifts till S2, a new equilibrium is made at point B. The shift of supply curve results in a great increase in price of the good, in this case the oil and gas. This is also reflected in the graph, as initially at P1, one could buy Q1 quantity of goods, but after the shift, the quantity that could be bought at the same point significantly reduced to Q2. Now due to an increase in price, the quantity demanded decreased as the price of the good increased to reach the new equilibrium.
(Figure 1.0)
Now because many consumers could not afford oil and gas and the overall demand fell, the production and consumption of an alternate product increased, there was a surge in the demand and supply of electric vehicles, moreover, research and development of hydrogen powered cars, solar powered cars and other concept cars also begin.
Additional information:
The GDP of Russia dropped by 2.1%, a significant amount for a country that huge, moreover the country encountered a huge drop in the imports and exports.
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