End of Ukraine War looms big for energy industry

A pumpjack operates as the Sun begins to set on the western horizon Monday, March 7, 2022, near Pleasant Farms. (OA File Photo)

The prospective end of the war in Ukraine raises numerous questions concerning the American and global energy industries.

As President Trump negotiates with Russian President Vladimir Putin and Ukrainian President Volodymyr Zelensky, a cessation of the hostilities might mean shifts in the flows of oil and natural gas in Europe.

That’s according to Odessa oilman Kirk Edwards and Waco economist Ray Perryman, who say the markets could be affected.

Edwards said the ongoing negotiations in Saudi Arabia regarding the Ukraine-Russia conflict are shaping up to be pivotal.

Kirk Edwards

“Russia has without a doubt been the aggressor in this conflict, relentlessly targeting Ukraine’s infrastructure,” he said. “What was once thought to be a quick victory for Russia has transformed into a prolonged war, costing hundreds of thousands of lives.

“What will be particularly fascinating to watch is the discussion around borders. Ukraine is rich in resources like oil and natural gas, houses several nuclear power plants and is known as the ‘grain basket of Europe’ for its massive wheat production.”

If Ukraine is partitioned or forced into unfavorable agreements, Edwards said, it could spark ongoing unrest both in Ukraine and in Russia with far-reaching impacts on global energy markets.

He said that for Europe this could mean shifts in the flows of oil and gas.

“Countries have already turned to the U.S. for liquefied natural gas to replace supplies once provided by Russia,” Edwards said. “But if Russia lowers prices to remain competitive, U.S. LNG exports might be diverted elsewhere, potentially driving energy prices down.

“This would create further challenges for U.S. producers, especially in the natural gas market.”

Edwards said another consideration is the billions in foreign aid that Ukraine has received, not to mention the enormous cost of rebuilding Ukraine’s infrastructure post-war.

“Russia, too, will face hefty reparations,” he said. “The key question remains: how will these two nations finance this rebuilding?

“Given Russia’s reliance on oil and gas exports, that revenue will likely play a crucial role in any long-term recovery. With so much at stake, this conflict will undoubtedly have far-reaching economic consequences for years to come.”

When the war ends, Perryman said, the effects on the energy industry will depend on both the specifics of the peace agreement and other market conditions at the time.

Ray Perryman

“While Russia’s capacity to produce and ship oil has been somewhat constrained due to the country’s wartime effort, the primary reason that Russian oil and gas are out of the market is the decision by Western nations and some others not to purchase them,” Perryman said. “In fact Russia has continued to sell oil to some countries at reduced prices.”

If the peace agreement is seen to be reasonable, he said, various countries may decide to lift their restrictions, which would have the effect of increasing the supply of oil available to Western purchasers and would therefore potentially contribute to lower prices over time.

“The natural gas market would take additional time to recover due to the more extensive damage to pipelines,” Perryman said. “The peace agreements may spell out some sharing of the cost of rebuilding, but if not the burden will largely fall on each country.

“It will be a long and difficult process and full recovery may take many years. The jobs and capital investments required to rebuild will naturally generate economic activity and jobs, but finding the resources to fund the effort will be difficult.”

Perryman said history suggests that rebuilding will likely occur with improved modernization and efficiency as occurred after World War II in Japan and Germany and more recently in Vietnam, but there are many complex factors that will determine the ultimate path.