September 6, 2023 - 4:15pm

Oil prices rose above $90 a barrel for the first time in 2023 earlier this week, as Saudi Arabia and Russia indicated they would extend their voluntary production and export cuts until the end of the year. That Russia feels sufficiently confident to extend these production cuts suggests that Western sanctions are having minimal impact, as Moscow increasingly reorients its exports towards Asia (crude exports to China and India eased month-on-month but accounted for 80% of Russian shipments). All this begs the question: who is really being hurt by these sanctions? 

The increasing cooperation in oil supply production between Opec and Russia also reflects deteriorating ties between Washington and Riyadh. The Biden administration has been keen to keep energy prices in check ahead of the presidential election next year, where inflation and fuel costs have already become areas of attack for the Republican Party.

More fundamentally, rising energy prices portend problems ahead for Europe heading into the colder months. This could ultimately impact Western support for Ukraine’s war effort, and significantly slow the global move towards the reduction of carbon emission.

That energy prices are rising despite mounting signs of economic distress in China, and the end of the summer driving season in the US (when demand for gasoline is at its highest) will collide with hopes that the West can ease its anti-inflationary tightening. This will prove particularly problematic for Europe, which remains the economic laggard among the global economy’s three main trade blocs.

The EU’s traditional locomotive, Germany, is looking particularly vulnerable: in July, corporate bankruptcies rose by 23.8% compared to the same month last year, according to the country’s federal statistical office. Even before this latest oil price hike, the IMF had forecast the country’s GDP to shrink by 0.3% this year.

Despite last year’s significant moves to blunt the dependency on Russian oil and gas, Europe’s energy diversification strategies are now taking a big hit, as Germany’s Berliner Zeitung notes. The latest statistics are striking: in the midst of the Ukraine war, Russia is exporting 334% more cheap fertilisers to Germany. This isn’t surprising, given that the average German business wants to survive, and so requires above all else affordable energy and fertilisers (people need to eat). Whether Washington likes it or not, German fertiliser production has collapsed and that automatically opens the door to Russian sources. 

For all the talk about green transitions, the global economy is still some way off the point when it can wean itself off fossil fuels. That is why the oil price rise is so significant. A carbon-free future may one day come into being, but it simply isn’t feasible in the current moment. Indeed, the International Energy Agency has warned for months that global spare oil production capacity is at a dangerous low. Global markets have no doubt been distracted by China’s deteriorating economic indicators and the latest US jobs report (which shows job growth slowing, albeit within the context of a still robust American economy). But the pledge by Moscow and Opec to sustain production cuts in crude oil has belatedly woken up markets and Western policymakers to the negative implications.

All of these factors could impact on Nato’s cohesion going forward, especially in relation to sanctions. The surge in energy prices has done much to highlight the contrast between the comparatively muted effects of sanctions on Russia and their more deleterious effects on Europe, which begs the question as to whether they will be sustained. Against this backdrop, does this suggest that Western support for Ukraine is reaching the end of its tether?

Marshall Auerback is a market commentator and a research associate for the Levy Institute at Bard College.