For the past years and certainly since 24 February 2022, we have had many opportunities to witness the power of geopolitics, its decisive impact on domestic and international politics and the supply of energy throughout the world. 

The geopolitical flow of energy

As far as the sources of energy are concerned, we must take a closer look at their primary and secondary dimension:

Primary sources of energy are those that are extracted (such as natural gas) or captured (such as solar energy), whereas secondary sources of energy refer to the products that derive from the transformation of primary sources.   Electric energy is a typical secondary source as it is the product of transformative processes such as controlled combustion of natural gas in a thermal power plant or conversion of solar energy into electric current within a photovoltaic power panel. 

Then there are the facilities that ensure the production and supply of primary and secondary energy – for example, refineries, power plants, electricity grids for transmission and distribution.  The infrastructure for production and delivery must be built and maintained in good order.  This requires parts and machinery to be produced from raw materials, most of which are available only in certain parts of the globe, and which need to be extracted, processed and shipped (often through many different countries) to factories (some of them being located in other parts of the world) and then transformed into OEM parts and equipment, which are shipped to the final destination (crossing once again many state boundaries). 
This constant flow of various forms of energy, raw materials, intermediate products, parts and machinery as well as the security of energy is dictated by physical and human geography – and its barriers.

Case in point: Coal vs. Clean Energy

An interesting example is Europe’s import of coal on a mass scale.  Under immense pressure from the European Union, financial institutions and a vast number of generously bankrolled activist pressure groups, many governments decided to scale down coal production, effectively not allowing any investment in developing new production infrastructure.  As with most extractive industries, the lead time from the investment decision to commencement of commercial operation is several years, especially when public procurement is required. 

Russia’s military invasion of Ukraine prompted a sharp increase in wholesale gas prices (approximately by a factor of three within several days). The ensuing uncertainty then prompted an increased demand for coal (a natural gas substitute for heating and power generation) both from businesses and private households as the demand could not be met by the decreasing domestic production. 

At the same time, several widely used coal transport routes become inaccessible because they originated in or passed through Russia or the war zone in Ukraine.  Wholesale coal price indices rose sharply as a result of skyrocketing global demand and contracting supply. For example, the ARA index often used by EU traders rose by about 140% in seven days since 23 February 2022 and in December 2022 traded at approximately a 30% premium from that day. But that was just the beginning. 
The additional demand from Poland alone, estimated at around 10 billion metric tons in 2023 (the equivalent of around 170,000 Panamax or up to 50,000 Capesize carriers), is putting significant stress on the existing transport infrastructure, including seagoing vessels, inland transit carriers, port terminals, transhipment and storage.  This infrastructure is generally finite and cannot quickly be scaled up: for example, there is a limited number of available dry cargo vessels or sea terminals capable of unloading and handling large amounts of coal. 
As is always the case, the vastly increased global competition for finite extraction and transportation resources translates into price increases and high levels of volatility until a new equilibrium is reached.

The security behind energy supply security

As far as the security of the supply of energy is concerned, we must consider two aspects.
First, there is the physical availability, which in simple terms answers the question whether a requisite amount of energy can be delivered to the destination in the required form and quantity.  For example, in December 2022, a large part of Ukraine was deprived of electric energy because both power plants and the delivery infrastructure (transmission and distribution grids) were, to a large extent, destroyed or captured by Russian military. 
Second, even if physical availability can be assured, the cost at which energy can be obtained by end users can be very expensive, making the use of energy either uneconomical (for businesses that cannot pass on increasing costs to end users) or adding an undue burden on the cost of living, eroding living conditions, causing poverty and social unrest which, in the end, might bring about political changes both locally and on a large scale.  For example, because of the Russian aggression against Ukraine, the Western world is moving away from purchasing and using Russian hydrocarbons. The resultant sharp increases in market gas prices through 2022 have caused many energy-intensive businesses across Europe to fail or to temporarily scale down production, as has already happened to the fertilizer industry.
Because of complex value and supply chains linking geographically remote points of production and delivery of energy to the end user in requisite form and at acceptable cost, the entire global energy system is subjected to forces that themselves are the product of many geopolitical vectors.  Notably, the situation in Ukraine has not only negatively affected the energy security and energy supply in many countries, especially in Europe, it may also cause profound ripple effects in the entire world.

One of the victims of rising energy prices is the fertilizer industry. The concentrated production of fertilizers and its increase in prices will eventually affect food production around the world. In the short term, this will lead to possible food shortages.  Add to this the limited number of crop exports from Ukraine (before the war Ukraine was the world’s major producer of foodstuffs) which could have far-reaching effects in poor countries that rely on cheap imports. 

Bleak future?

What seems to be a local event might easily have global consequences and energy, being the equivalent of the pulsating human blood stream, is the means that can spread and exacerbate negative consequences around the globe.

Pawel Kowalewski

Group Practice Leader Energy, Power and Mining

T +48 507 085 066

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