This is a different kind of update. Because this is the story of why Vladimir Putin attacked Ukraine when he did, why Ukraine is waging its counteroffensive now, and how Russia is engaged in a desperate last-shot gamble that still could pay off. So just for this morning, no maps, and no tweets of captured Russian gear … at least until we get around to the updates to the update. This morning we’re starting with the price of natural gas.
Right now, natural gas is trading for a global price of around $8 per MMBTU (a BTU is an arcane unit involving the amount of energy required to heat a fixed amount of water). That’s not a historically high price. As recently as 2008, natural gas touched $14/MMBTU. Go back a decade more, and it was routinely above $20. The use of fracking, which accelerated globally around 2000, made gas much more readily available. It was the rapidly falling price of natural gas that radically altered the energy market in the United States, and pretty much blew up the coal industry starting in 2008.
By 2009, prices of natural gas plummeted. For better than a decade, prices bounced around between $4 and $6, and twice dipped down to $2 when world storage facilities were nearly full. Then Russia’s illegal, unprovoked invasion of Ukraine and the resulting sanctions drove prices to spike above $9. There was even a brief period, right after Putin sent the tanks across the border, where the markets went into a full-scale panic, driving prices to $23. It’s fallen back since, but $8 is still very high when compared to the usual cost since 2009.
When newscasters report that energy costs are rising 80% in Germany, the U.K., or in other areas, that’s what they’re talking about. For just over a decade, Europe, like the United States, has been engaged in replacing other forms of power with natural gas. Because gas was so cheap. In 2008, there were dozens of new coal plants on the drawing board in the U.S. Some were even in construction. None ever got up and running because gas was just so darn cheap. Anyone who thinks that something as large as how the world makes electricity can’t make a rapid change should look again at how that market has changed, and changed again, in the last two decades.
Now natural gas has gone up—up to a price that’s still cheap historically—but high compared to the last dozen years. Europe never had any doubt about the source of its cheap gas. They had only to look at the twin giant pipelines draped across the North Sea to see it. In converting to an energy system dependent on an abundance of cheap natural gas, Europe made a huge bet on the stability of the Russian Federation.
This means that right now, prices are high. And there is damn little Europe can do about it. Gas, even more so than oil, is a fungible product, with prices set on a worldwide balance of supply and demand. Take out some of that supply, and prices go up everywhere. That’s true even for places like the United States, which is a net exporter of natural gas.
High energy prices are definitely hurting Europe right now. They make the cost of everything made there more expensive. They make workers unhappy because workers see more of their paychecks going to pay the light and heating bills. They make politicians unhappy because unhappy workers make for unemployed politicians.
Russia is now engaged in its biggest propaganda campaign of the war. It’s engaging social media, traditional media, and funding “grassroots” protests in multiple nations all on the same theme: Without Russian gas, Europe’s industrial base will collapse, unemployment will soar, and people will be left shivering in freezing houses over the winter.
Perhaps the most amazing thing about this narrative is just what a fine job Russia has done in getting Western media to repeat it. Everyone loves a good doomsday story, and you can certainly find this one on CNN, Fox News, and other fine purveyors of video clickbait.
But that story? It’s not going to happen.
It’s not going to happen for one very simple reason: Europe is rich. If it can’t get super-cheap gas through a pipeline from Russia, it will just get more expensive gas from elsewhere. Energy bills will go up. It will generate inflationary pressure. None of that stuff is good. But no one is going to freeze, and no national economies are going to fold because of this. Europe is now paying a price for gas that’s higher than it has been, but it’s still way cheaper than it used to be.
The only real threat here is the political one. Russia may not be sending gas, but it is really, really pumping that propaganda. It is working very hard to sell the idea that “Russian gas = good economy,” and the media is helping. It’s helping both by pushing the ”winter is coming” story Russia is selling, dire wolves and white walkers included, and by giving the kind of outsized attention to Russian-supported rallies that U.S. media provided to the Koch-funded Tea Party.
That’s the big bet Vladimir Putin is laying right now. He thinks, or at least hopes that, with the help of media horror stories, synthetic protests, and genuinely high energy bills, European politicians will be pressured into suspending support for Ukraine, dropping sanctions against Russia, and pushing for a negotiated settlement that leaves Russia with territorial gains (or, at least, no loss).
The “freeze in the dark” narrative has extended into Russia’s on-the-ground strategy in Ukraine, especially after the Russian military was handed its corruption-riddled ass in Kharkiv. The new strategy being pressed from Moscow and supported by pro-Russia propagandists doesn’t really call for the Russian army to do much of anything. They just need to hold their ground while the “missileists” do the work.
The theory goes that by attacking Ukrainian power plants with ballistic missiles, Russia can make Ukraine even more of a burden. In recent months, Ukraine had offered to export electricity to the rest of Europe. But, say the pro-Russian sources, if Russia can take out enough of Ukraine’s generating capacity, Ukraine will have to import power instead, making it even more of a burden on neighbors who have already donated billions and taken in millions of refugees.
It’s unclear how effective this strategy might be in causing misery in Ukraine. One of the power stations that was hit over the weekend appears to be up and functioning on Tuesday, with power restored to most of the area. However, this strategy doesn’t require anything of the Russian army, and if the last seven months have demonstrated anything, it’s that this is the best way to start any plan.
And there’s another part of this same story, one that explains why Putin attacked when he did. The reason for that also goes back into those long-term energy trends.
Europe has been aware, even as it built out an economy that was ever more tied to cheap, available natural gas over the last decade, that this was a temporary situation. They’re aware of this thing called the man-made climate crisis. Far more aware of it than most people and politicians in the U.S. They’ve already made the commitments to transition their nations away from fossil fuels, including natural gas, in the next few decades.
Vladimir Putin sees European dependence on natural gas as a lever that he can use to exert political pressure on the West. Every pipeline built, every cubic meter sold, has had, for him, the happy result of both increasing Western reliance on Russia and putting more money in Russian banks (or personal accounts of oligarchs who keep their money in Cyprus … all the same as far as Putin is concerned).
But that lever is on a timetable. Because another long-term energy trend has been the constantly dropping cost of wind and the absolutely plunging cost of solar. In 1980, the cost of generating electricity with wind was double that of natural gas—and that’s when natural gas availability was erratic, and prices were higher. The cost of solar at that point is barely worth mentioning. It was at least an order of magnitude higher than wind. But by 2010, even though the prices for natural gas has collapsed, the constant improvements in wind and solar meant they were only 20%-40% more costly. Which is, admittedly, a lot when it’s on your energy bill.
As of 2020, the average cost per megawatt of new power created by both wind and solar was cheaper than natural gas. That was before Putin’s war doubled the cost of gas. At this point, environmental pressures and economic pressures are very much on the same side. Both are pressuring to replace much of Europe’s natural gas with renewable energy. Based on what the world saw when gas became significantly cheaper than coal and other sources, that change can happen very quickly.
What do you get out of all this?
If Putin wanted to use his perceived lever to make a play for expanding Russia, he had to do it now. Because in a decade, there’s a very good chance that lever will be much, much weaker. If not nonexistent. The tumble of gas prices to the $2 range in the summer of 2021 likely played into Putin’s now-or-never thinking.
Ukraine needed to make a significant counteroffensive now, not just because there was an opportunity to attack, but because it needed a significant indicator that it was going to be able to defeat Russia quickly, not over some very lengthy timeframe. It needed that opportunity before winter. Otherwise, European politicians would be much more easily pushed out of supporting Ukraine by a populace facing high energy bills—and a media so eager to see some of that freezing that it might just pitch someone into an icebox.
Those pressures in Europe also apply to the United States. Those who had not been watching Fox or listening to Republican campaigns might have missed the none-too-subtle discussion of how U.S. prices were being adversely affected by support for Ukraine, with a direct tie to Tucker Carlson’s nightly “Russia has this in the bag, we should pull for those guys” telethon. It’s very definitely there.
Unfortunately for Russia—and Republicans—Ukraine’s counteroffensive in Kharkiv didn’t just work, it worked spectacularly. It made it clear that, rather than dragging on year after year, this conflict really could be over in months.
Long term, that’s a huge burden on Ukraine. Pulling off a spectacular win on a regular basis is a lot harder than doing it once. But Ukraine doesn’t have to worry about the long term right now. It has to worry about the next few weeks, and what happens when nations like the U.K. allow higher energy prices to reach the public.
The win in Kharkiv has thrown a real crimp into Russia’s “inevitability” narrative. Heading toward winter, Ukraine is now well positioned to continue receiving assistance and support, and resolve concerning Russian sanctions is much less likely to soften.
Finally, on the other end of this stick, Russia is making a big deal of how it’s continuing to sell high volumes of natural gas in spite of sanctions, and is finding new markets with China and other customers in the East. Which is true. However, what’s also true is that those customers know they have Putin over an enormous barrel: Russia’s economy is absolutely dependent on selling gas, and he literally has nowhere else to go. So all that oil Russia is selling now is going out at a steep discount. At least 50%.
So while prices may be high because of Russia, Russia is not benefiting from those high prices. It’s selling less gas and selling it for about the same prices that were going on last year. They can jigger the numbers all they want, and the media may be standing by to assist, but this war is extremely costly for Russia in terms of men, materiel, and rubles.