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Liam Denning: Russia’s mutiny underscores oil’s fragility

By Liam Denning Bloomberg Opinion

Last Friday morning, one of the more diverting headlines about Russia concerned one of its diplomats apparently squatting on a plot of land in Canberra, defying the Australian government in a dispute over a new embassy. Nonplussed, Prime Minister Anthony Albanese dismissed this minion of Moscow as “some bloke standing on a blade of grass.” Ah, Russia.

Within 24 hours, headlines were instead debating a potential coup in the world’s second-largest exporter of crude oil (and largest holder of nuclear weapons). A further turn around the sun later, we were all left wondering what, if anything really, had happened.

Oil prices were, understandably, unmoved. In terms of barrels flowing and who runs Russia, nothing had changed. And the oil market is used to drama, even drama of what might be called Wagnerian proportions. After all, an actual war, in Ukraine, and subsequent severing of energy links – sometimes explosively – sent oil back into triple digits in 2022 for the first time in eight years. Less than 18 months later, the price is actually below where it stood on the eve of the invasion.

But the seeming inconsequence of a one-day mutiny led by an obscure figure, Yevgeny Prigozhin, belies a more fundamental challenge to our energy system as currently conceived. Russia’s weekend drama may not have turned out to be much of a catalyst, but it is a powerful symptom. In an added twist, Progozhin turns out to be an unlooked-for ally simultaneously to Big Oil and Big Transition.

The oil market is a colossus of the modern world, generating more than $3 trillion a year, bankrolling entire nations and mobilizing humanity. The Ozymandian scale obscures its fragilities. Consider: Just three countries produce more than 40% of the world’s oil. One, Saudi Arabia, is an absolute monarchy run by an impulsive crown prince attempting the not-small feat of turning his petrostate into a diversified, modernized economy. Another, Russia, is a revanchist, decayed empire where a former caterer has just shaken its autocratic power structure inside of a weekend. The third, the U.S., is more stable relative to the other two but not, at present, relative to its own history, with the divide over energy and climate change just one fissure in a bigger web of institutional cracks.

Beyond these three, there are smaller but still significant oil producers that aren’t exactly in peak condition: Nigeria, Iraq and Libya to name a few. The world’s largest oil reserves, an estimated 300 billion-plus barrels, mire beneath the soil of Venezuela where, in all likelihood, economic and political decay will keep the vast majority of them confined.

Three other important dynamics are at play. First, the threat of climate change, and the policies engendered by that, point toward a coming peak in oil demand. Second, western oil companies are constrained in terms of investment in new supply, in part by that threat to future demand, but more by the legacy of financial mismanagement in the 2010s, turning off investors.

Third, war and a broader shift in international relations, including trade, are changing the basic arrangements under which oil took primacy in global energy after World War II. A big reason major economies felt comfortable basing their way of life on fuel imported from unstable parts of the world or outright adversaries – such as the former Soviet Union – was a robust, U.S.-led security order more-or-less guaranteeing oil flows. That order is increasingly questioned, not least by a shale-intoxicated U.S. itself – witness, for example, Washington’s shrug when a critical Saudi Arabian oil facility was attacked in 2019. The U.S. has also become increasingly comfortable with deploying energy (or sanctions on it) as a weapon.

The Russian mutiny, akin to the sudden appearance – and near miss – of a comet, serves to remind the world of all this potential volatility lurking beneath oil’s surface. At a high level, the world relies on a commodity with a disproportionate number of politically or economically unstable producers, and where politics and investor tastes have combined to suppress spending on alternative sources in more stable regions. The latter, after all, offered insurance, in the form of booms in places like the North Sea and Alaska, after the 1970s oil shocks. The system we have today rests on weak foundations and smaller tolerances.

This situation offers succor for oil’s bulls and its wannabe undertakers. On the oil side, threats from abroad mean boosting home-grown supply in an echo of what happened in the 1970s. Even if barrels from the U.S. and allied countries aren’t always the cheapest, they are at least secure from the sort of upheaval epitomized by Prigozhin’s mutiny. On the transition side, Prigozhin’s mutiny is, like the Russian war itself, just one more reason to get off oil altogether. The only way to truly neutralize the threat from Russia, and the leverage of other petrostates, is to break our addiction to the fuel that funds them.

The oil bulls promote diversification of supply within the existing paradigm; transitionistas push for diversification of demand to the point of shattering that paradigm. Yet there’s a Moebius strip lurking within these opposing views. Efforts to put an end to oil demand, such as vehicle electrification, provide a reason to hold off investing in new domestic oil production. Yet the latter, by leaving us more vulnerable to shocks, carries economic and political risks, given that we will remain dependent on fossil fuels for years to come even under rosy transition scenarios. Climate change along with Russia’s naked aggression, and fragility, are winning arguments for fundamental changes to our energy habits that reduce the risk of both. In getting there, however, we rely on an existing system whose integrity erodes the more we try to get away from it.

By the start of this week, Russia’s man in Canberra had reportedly also given up the fight. Whatever passes for normal in Australia-Russia relations is no doubt intact. But the world today is just that bit different from what it was at the close of last week. We’ve had a powerful, if brief, reminder of how much havoc even one bloke might wreak on our energy system.Liam Denning is a Bloomberg Opinion columnist covering energy and commodities. A former investment banker, he was editor of the Wall Street Journal’s Heard on the Street column and a reporter for the Financial Times’s Lex column.