IEEJ：September ©IEEJ 2022
Special Bulletin
A Japanese Perspective on the International Energy Landscape (601)

September 8, 2022

Geopolitics over Russian Energy Supply and Division of International Energy Market

Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
This week, I had opportunities to deepen discussions on the growing destabilization of theinternational energy situation under the Ukraine crisis and the fate of Russian energy supply holding
the key to the destabilization through a webinar sponsored by the Institute of Energy Economics, Japan,
and my talks with other experts. I also exchanged views with other energy experts on the geopoliticalsituation regarding the divide between the “China-Russia bloc” and Western countries and theirrelations with new “third pole countries”, which may have great influence on the international energy
order. In the following, I would like to make comments on some impressive points regarding thesematters.
First, I felt that great destabilizing factors remain in the international energy situation
towards the coming winter. Recently, crude oil and European natural gas prices have followed adowntrend. On September 7, the key crude oil futures price fell to $81.94 per barrel for West Texas
Intermediate, the lowest since January, and to $88.00/bbl for Brent, the lowest since February. Thebenchmark European gas price sank to less than $70 per million British thermal units from a record
high close to $100/MMBtu. The price was still very high, translating into some $400 per barrel of oil
equivalent. However, the downtrend is clear. Nevertheless, future trends are difficult to predict.
Concern above global economic deceleration has exerted downside pressure on crude oilprices. Particularly, concern has grown about a Chinese economic slowdown. If Chinese oil demand
weakens after driving up global demand, downside pressure on oil prices may increase. On the supplyside, Iranian oil may come back to the international market, depending on progress in U.S.-Irannegotiations on a nuclear deal. This may work to push down oil prices. Considering these factors, theOPEC-plus group of oil-producing countries at its meeting on September 5 decided to cut oil
production by 0.1 million barrels per day from October, offsetting a 0.1 million bpd increase agreed
at the previous meeting. The group including Saudi Arabia apparently sent the market a message that
it would not hesitate to cut production in response to oil price falls.
However, concern about Russian oil supply has become a destabilizing factor for theinternational oil market. On September 2, the Group of Seven industrial democracies at their online
meeting decided to introduce a cap on Russian oil prices on December 5. The Russian oil price cap
was proposed by the United States at a G7 summit in Germany in late June for the apparent purposeof preventing oil supply disruptions while suppressing Russian oil revenue. While the date for
introducing the Russian oil price cap has been set, details of the cap are left for future negotiations.
How China and India subject to the cap would react to the G7 action is still unknown. Russia’s reaction
is even more important regarding the stability of the international oil market. In an immediate warning,
Russia has indicated plans to suspend oil supply to countries participating in the cap. If Russia
implements such oil supply suspension, crude oil supply may decline substantially in a manner to push1

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up crude oil prices. The international oil market may grow nervous about the Russian oil price cap
towards the coming winter.
The Russian gas supply issue is more complicated and serious. The European gas market isplagued with Russia’s reduction and suspension of gas supply through the Nordstream pipeline.
Russian gas supply disruptions and subsequent gas and electricity price hikes and gas shortages may
seriously affect the European economy and civic life. The gas issue has become the biggest
geopolitical energy issue between Europe and Russia. A factor behind Russia’s offensive using gas
supply cuts and suspensions may be that oil export revenue, which is dominant in Russia’s energy
export revenue, is and will remain allowing Russia to exploit its gas supply for exerting pressure on
Europe. This is an attention-attracting point. If Russian gas supply is disrupted, the benchmark
European gas price may shoot up beyond the earlier record high. In the coming winter, Europe may
consume all gas inventories, forcing the European gas market to remain structurally vulnerable in 2023.
The fate of Russian gas and oil supply towards the coming winter will be a big destabilizing factor for
the international energy market.
Second, I would like to point out an issue regarding the division of the international energy
market. Russian energy embargo participants buy non-Russian energy sources at inflated market prices,while non-participating countries procure Russian energy sources at discount prices. In this way, theinternational energy market is divided into two over Russian energy supply. The division between
Western countries and the “China-Russia bloc” has thus been apparent in the energy market. Other or“third pole countries” are positioned to to decide if they join either of the two poles or not. “ChinaRussia bloc” countries could exploit energy supply as leverage for enhancing or maintaining strategiccooperation. This could be combined with developing countries’ discontent with developed countries
over the escalation of the north-south confrontation involving the climate change issue, as well as
various views and stances about democracy, freedom and other Western values, to deepen the divisionof the world and make the geopolitical environment severer for Western countries. Even Westerncountries could be divided. In the face of the potential energy crisis towards the coming winter,
European countries could fail to keep in step in dealing with Russia. If European countries pursue“me-first policies” in securing stable energy supply, they may lose their solidarity. Russia for its partmay take advantage of their loss of solidarity to shake the Western bloc. If the division of the worldgrows structural or deepens amid the difficult international energy and geopolitical situations, relevant
issues may be complicated further and become more difficult to resolve.
Third, I would like to note that trends in China as the world’s largest energy-consuming and-importing market will attract growing attention in the future. If grave disruptions to oil or gas/LNG
supply come, the degree of destabilization in the energy market may depend on what actions China
would take in procuring energy sources. How much Russian energy China would procure in theinternational energy market to be divided further may determine the energy volume available for othermajor energy-consuming countries including Western nations. Future economic growth in China thatretains the so-called “zero-corona” policy may also attract attention. Along with China’s initiatives toexpand domestic fossil fuel production, the degree of its economic growth may exert influence on its
energy imports and on the supply-demand balance in the international energy market. If Russia as
China’s strategic partner loses its power in the long run through Western economic sanctions amid theUkraine crisis, such development may work to the disadvantage of China that faces competition withthe United States. If the unity of Western countries including the United States and European countries
is enhanced through their response to the Ukraine crisis, it may also affect China. What strategies
China would adopt for Russia and “third pole countries” in dealing with the United States or Westerncountries may become a significant issue for the overall international situation and a factor to exert
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great influence on energy geopolitics.
While watching the international energy situation and geopolitical environment amid theUkraine crisis, Japan will be required to develop its domestic and external strategies regarding theroles that it should or could play to protect its energy security and stabilize the world.

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