The invasion of Ukraine is leading to further turmoil for global energy markets already badly affected by extreme price volatility over the past two years, according to the Institute for Energy Economics & Financial Analysis. Oil prices have now passed US$100 per barrel for the first time since 2014, while other commodities like liquefied natural gas (LNG) – which has recently seen record low prices followed by record highs – are set to experience continued volatility.
For Asian economies dependent on imported fossil fuels, volatility since 2020 has caused fuel shortages, government subsidy burdens, inflation, food scarcity, and political instability. The invasion is likely to exacerbate commodity price volatility, which undermines Asian countries’ economic growth and obstructs the region’s arduous recovery from the COVID-19 pandemic.
Natural gas and coal are often pitched as more reliable fuels for power generation than renewables. As a result, many Asian countries continue to support new fossil fuel infrastructure. But the crisis demonstrates that ramping up fossil fuel imports will only make Asian economies more vulnerable to disruptions in global commodity markets. Advancing alternative technologies to bolster energy security is seen as a viable alternative that is free from geopolitical interference and contributes to both long-term climate and financial stability.
There are three immediate implications of the Russia-Ukraine crisis on Asian economies. First, global energy prices will likely remain high and volatile for the near term. Prices were already widely expected to remain elevated in 2022, due primarily to the global economic rebound.
LNG prices, for example, were already susceptible to upward pressure due to interregional competition for cargoes between Asia and Europe, low European storage levels, limited piped exports from Russia to Europe, and harsh weather throughout the 2021-22 winter buying season. In October 2021, Asian LNG prices reached their highest level ever, at US$56 per million British thermal units (MMBtus). The Russian invasion now adds upward pressure to LNG prices.
The second implication of the crisis is that continued commodity price volatility will continue to wreak havoc on national efforts to recover from the COVID-19 pandemic. Specifically, high-priced imports are raising consumer power prices and stoking fears about future fuel shortages in the region. As a result of exorbitant LNG prices, proposed and existing gas assets in Asia may go under-utilised and risk becoming stranded assets.
The third implication of the conflict is that fossil fuel companies are likely to argue that the world needs more fossil fuel infrastructure, not less. In the wake of the invasion, Japan’s JERA announced a partnership with ExxonMobil to build a new LNG import facility in Vietnam, Australia said it would target emerging LNG importers in Asia, and Pakistan’s prime minister travelled to Moscow to discuss a pipeline in Pakistan that would carry re-gasified LNG from the country’s southern coast to northern provinces.
However, two lessons from the conflict should be clear. First, energy insecurity and volatility are part and parcel of global fossil fuel markets. Myriad factors can affect commodity prices, including geopolitical conflicts, pandemics, outages at export infrastructure, and even ships getting stuck in major shipping routes. Such unexpected occurrences can trigger nationwide energy shortages.
Therefore, the continued build-out of LNG and other fossil fuel import infrastructure in Asia will only reinforce vulnerabilities related to energy security and economic growth.
The second lesson is that low-cost, domestic renewables represent a crucial hedge against the volatility of globally traded fossil fuels because renewables like wind and solar do not require fuel inputs, and have demonstrated consistently lower and stable costs over time.