“The sheer scale of cuts to Russian gas to Europe is so significant because they just can't replace it with anything in the short term. That's going to force them to make some hard decisions like restricting gas consumption to certain sectors, particularly big industrial users,” Hynes says.
“Cutting gas to industrial users will ultimately lead to weaker industrial output and that does not bode well for countries like Germany. Unfortunately for the rest of the continent and the globe it will also likely lead to an increase in emissions in the short term as they push back towards fossil fuels to meet that gap.”
Hynes adds: “Coal in particular will be leant on a lot more with Germany already looking to restart old coal-fired power plants. And they're also look to delay the phase out of their nuclear power industry.”
The silver lining to the conflict in the medium to longer term is it will likely accelerate investment in renewable energy. In the meantime, energy users must work out how to plug the gap.
Liquefied natural gas may play a bigger part as the transition evolves because it produces fewer emissions than coal or oil and it can be brought on relatively quickly compared with other energy sources. It may also allow Europe to more quickly phase out Russian oil and gas.
The feat would be significant as Russia produces about 12 per cent of global oil supply. A hit of that magnitude will create big waves across the industry and the full implementation of sanctions don't take effect until year end, Hynes says.
“We haven't yet seen the full force of those sanctions apply to the oil market and ultimately it will be extremely difficult to replace,” he says. “Especially due to the lack of investment in new capacity, in part because we've had prices falling as demand weakened just prior to the pandemic.”