Gas Prices: Why EU and UK Sanctions Game Will See No Winners

"It was already a very big burden – on which the [UK] government has offered subsidies – before the imposition of the latest sanctions. Any 'wartime boost' to [UK Prime Minister Boris] Johnson’s popularity (went from -17% to + 17% among Conservatives!) will not survive the inevitable dramatic rises due to the new sanctions", says Rodney Atkinson, a British academic as well as political and economic commentator.

Last month, British industry regulator Ofgem signalled that the energy price cap would be increased by £693 ($916.67) from April 2022 as a result of an unprecedented 54% spike in global wholesale gas prices. British households on default tariffs will now be facing bills of £1,971 ($2,607) a year, according to iNews. Still, the rally in natural gas prices has been accelerated by the West's sweeping sanctions over Moscow's special operation to demilitarise and de-Nazify Ukraine, which started on 24 February.

On 4 March, European gas futures prices increased by 30% reaching a record high of $2,400 per 1,000 cubic metres, according to the London-based ICE exchange. Even though the UK is less reliant on Russian gas than other EU states, Europe-wide sanctions are driving British energy prices higher as part of a knock-on effect.

"Whether Britain is inside or outside the EU, the energy prices it pays are indeed linked to the EU since it gets a lot of its gas needs from the EU", explains Dr Mamdouh G. Salameh, an international oil economist and visiting professor of energy economics at ESCP Europe Business School, London.

Britain's Prime Minister Boris Johnson, right, chairs a socially distanced government Cabinet meeting at the Foreign and Commonwealth Office (FCO) in London, Tuesday Sept. 15, 2020.

Foreign secretary Liz Truss on 27 February told the BBC's Sunday Morning that "fighting for freedom" in Ukraine "has a very high cost for us", insisting that it's a price worth paying.

"Liz Truss has lost any credibility she ever had with her disastrous failure to understand even basic geography (confusing the Baltic with the Black Sea and Russian regions with the Donbass) and her penchant for making others pay for her 'price worth paying'", says Atkinson. "The horrendous energy price rises will not be seen as a price worth paying by anyone. And the Government’s own finances post COVID cannot do a lot to help".

Meanwhile, British businesses have already been affected, according to him. He singles out the steel industry, which has been crippled both by rising energy prices and carbon taxes, as well as the failure of the Biden administration to lift tariffs on British steel exports. Chemical firms, which are energy intensive, are also badly hit, according to the economic commentator.

To complicate matters further, the Johnson government on 1 March imposed a ban on Russian vessels docking in the UK. This "will have additional disastrous effects on the economy", says Atkinson, adding that all this is happening before Russia introduces its potential energy counter-sanctions.

"There is… the possibility that Russia might retaliate against sanctions by halting its global oil and gas exports", says Salameh. "Russia exports 8.0 million barrels a day (mbd) in total composed of 5.0 mbd of crude and 3.0 mbd of refined products. Either case, it will cause Brent crude to rise further to even $120 and gas and LNG prices to hit unheard of levels. This will very adversely affect the global economy particularly the economies of both the United States and the EU".

The LNG tanker "Clean Ocean" is pictured during the first US delivery of liquefied natural gas to LNG terminal in Swinoujscie, Poland June 8, 2017.

Meanwhile, The Independent projected that Britain may step up action against Russia’s oil and gas industries next week. On Friday, Liz Truss urged European counterparts in Brussels to stop energy imports from Russia, with EU foreign affairs chief Josep Borrell signalling that "everything remains on the table".

"The EU and indirectly the UK will remain dependent on Russian gas supplies for at least the next 10 years unless Russia decides to switch all its exports to China instead", says Salameh. "The reason is that all alternative potential suppliers of gas and liquefied natural gas (LNG) can’t provide enough supplies to replace Russian gas supplies for the foreseeable future".

The combined LNG exports of the United States, Qatar, and Australia, and also Norway’s gas exports, can barely replace the 200 billion cubic metres (bcm) of Russian piped gas supplies annually and 15-16 million tonnes of LNG now or even in 10 years from now, according to the energy expert. In addition to that, the EU has limited import capacity for LNG, he notes.

There will be no winner in this sanctions game, since the restrictions could harm the economies of those who impose them more than those on whom they are imposed, according to Salameh: the higher crude prices go up, the higher the inflation and the more damage inflicted on European economies.

"Long before the present sanctions against Russia, it was estimated that sanctions cost EU countries some $100 billion", says Atkinson. "This will have risen considerably in a community with a very serious banking crisis post COVID. Certainly even the sanctions on the SWIFT payments system has turned out to be a failure with only 25% of Russian banks affected so that payments for Russian gas can continue. I think Russia will continue to supply, holding the ultimate counter sanction for the negotiations which will take place over the position of post war Ukraine".