Economy

What are the consequences of reducing our dependence on Russian energy?

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The generation of energy is something most of us only appreciate when it isn’t working.

Having grown up in the digital age, where technology has become a necessity for daily living, access to resources which require electricity is the norm, not the exception. Indeed, a key measure of countries advancing is how their economies industrialise.

Secure energy sources and guaranteed electricity are seen as just two measures for ensuring secure development. 

What happens then, when that energy is being obtained from a monstrous government? That is just one adjective that could be used to describe the Russian President Vladimir Putin following his illegal invasion of Ukraine a month ago. Undoubtedly committing war crimes, his actions have caused the largest refugee crisis since the Second World War and thousands of civilian deaths. 

Given Ukraine is not in NATO, a direct conflict involving the west has been ruled out. Yet states still want to – understandably and correctly – support Ukrainian President Volodymyr Zelenskyy’s endeavour for sovereignty and the pursuit of justice. This means they’ve adopted a multitude of measures including widespread sanctions on Russian oligarchs and seeking to economically, if not militarily, cripple Russia. Indeed, given Russia’s economy is roughly the size of Italy’s, there is a great desire to simply make the state’s continual funding of the war unaffordable. 

Western states have realised then, that if they want to condemn Russia where it really hurts, there is no option but to reduce its energy dependency on the state. According to Statista, oil and gas exports made up 4.9% of Russia’s GDP in 2020, down from 7.2% in 2019 and a high of 10.9% in 2006. Indeed, Russian oil makes up 44% of its exports and 17% of its federal government tax revenue according to the UK government, with nearly 70% of Russian oil now currently struggling to find a buyer following the invasion. 

In the UK, the level of dependency is not so great. The government say Russian imports account for 8% of our oil demand, while gas is 4% of our supply.

While it will be a challenge, the phasing out at home doesn’t look an impossibility. Elsewhere, the situation is more bleak, with, for example, Germany importing about 56 billion cubic meters of natural gas in 2020, with nearly 55% of its gas coming from Russia. This stands alongside Moscow providing 34% of German oil, with the EU as a whole important 168 billion cubic metres. 

Despite being well aware of Putin and his style of governance for decades, western governments have not used the opportunity to properly remove their dependency on Russia for generating energy. As such, by reducing this dependency now, prices will invariably increase. Why, you ask? The demand for something has remained the same but countries have decided to reduce the supply. 

The economic and social costs of removing Russian energy dependency look stark. Germany has warned that, if it were to immediately boycott Russian energy sources, widespread unemployment and poverty could be an inevitability, with people running out of petrol and unable to heat their homes. The invasion has come alongside a general cost of living crisis as inflation surges, with the Ukraine invasion simply a catalyst for even more economic insecurity.

Given the Bank of England predicts inflation looks set to rise to 8% by the spring, far above real wages, the financial pressures facing many will only be turbocharged. 

In the UK, the energy price cap (previously dismissed as a Marxist proposal when former Labour leader Ed Miliband first proposed the idea), is set to increase by 54% this April, increasing typical energy costs form £1,277 per year to £1,971 per year, adding £693 to average household bills. This price cap is not the maximum amount someone can pay but simply the maximum rate for each unit of gas and electricity, meaning real prices could be far higher. 

As ever, it is easy to point to the problem rather than offer a solution. Clearly, a reduction in foreign energy generation requires greater domestic energy production.

Campaigners like Nigel Farage, who are sceptical about the UK’s net zero emissions strategy, have called for fracking to be reintroduced.

I’m not convinced, especially given its a finite, costly industry that we’re well aware will soon have to come to an end. The Prime Minister similarly sought to strike a deal with Saudi Arabia, the leader of whom ordered the murder of dissent journalist Jamal Khashoggi, with limited success. 

Instead, nuclear energy is something the government can and should be looking to expand. Currently, the UK generates around 15-20% of its electricity from nuclear energy, though, staggeringly and bafflingly, half of its current capacity looks set to be retired by 2025. With 11 reactors operating, two under construction and 34 shut down, that number needs to be increased. The figure is even more damning when you consider, in 1997, nuclear power generated 25% of UK electricity. Why did governments and industry allow a green, safe form of energy to be neglected? Though Hinckley Point C has been given the go ahead, further plants must be expanded. 

The Resolution Foundation think tank have argued that a typical household will likely see its income fall by £1,000 due to the impact of inflation, as prices rise at their latest rate in three decades while regular pay fell by 0.8% in real terms.

In his Spring Statement, the Chancellor Rishi Sunak cut fuel duty by 5p a litre and raised the national insurance threshold by £3,000 a year. These changes, it has been argued, will benefit middle class earners over those already facing immense poverty. 

The government has undoubtedly faced serious challenges in its 12 years in office (a fact which is easy to forget). Battling the Covid-19 pandemic and managing this latest geopolitical conflict are a task no former Prime Minister would envy. However, it’s clear that state action on alleviating the suffer of those most economically insecure, who are only going to be made more worse off, is essential. On both energy production and financial assistance, the government have the logistical and financial tools. The question is whether they are willing to use them. 

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