Rewiring the Energy System

The world has been drifting for years into a more multipolar order, as deglobalization, China’s rise and evident limits to US influence undermined the post-Cold War norm. The Ukraine crisis has given this shift a boost — and the loose architecture of a more multipolar, post-Bretton Woods system is starting to take clearer shape. Organizations like Brics or the Shanghai Cooperation Organization have been around for some time, but have largely served as political talk shops. What’s now emerging — outside those frameworks — is something more tangible, ranging from a splintering of oil and gas markets to the growth of non-dollar payment mechanisms, closer ties between China and the Mideast Gulf, and nascent talk of a Latin American currency union.

On one level, the war had a direct and obvious impact: It pushed Europe and the US closer together, forced Russia to pivot more decisively east, and presented others with decisions on which side to choose. It was also a strong prompt for countries to address their own vulnerability, including to ever-proliferating US sanctions. As much as Washington has endeavored to rally others around the threats posed by Russia (and China), many countries decided to ignore that narrative and instead take positions — and, importantly, pursue trade and commercial relations — that best serve their own national interests.

India, for one, made clear that it would take as much cheap Russian oil as it liked, to mitigate high energy prices and tighter supplies — regardless of the implications for Europe or Ukraine. Saudi Arabia, similarly, resisted US pressure to release more oil supply, stood firm on its Opec-plus partnership with Russia, and signed a series of agreements with China on economic cooperation. Questions are now being asked as to whether this could extend to tectonic shifts on currencies used in energy transactions.

Putting Themselves First

In putting their own interests front and center, the likes of India and Saudi Arabia were behaving no differently from the West: Europe’s race to source LNG to replace piped Russian gas priced many Asian consumers out of the market, for example. India has taken full advantage of Russia’s hefty discounts despite initial US pressure to steer clear: It has imported around 1.25 million barrels per day of Russian crude since early December, after taking an average 800,000 b/d in 2022 and just 50,000 b/d before the Ukraine invasion. India, which has longstanding military ties with Russia, wants to prevent Moscow from getting too close to regional rival China. New Delhi also knows that Washington values it as a counterbalance to Beijing from supply chains to security.

Saudi Arabia’s pursuit of parallel alliances also bears witness to this sharpening multipolarity. US-Saudi ties were tested when Riyadh in October ignored pressure from Washington for more oil supply, and, concerned about demand uncertainty, led an Opec-plus production cut instead. In the tumult that followed, it became evident there were limits to how far any Saudi-US split would go, given the tight security ties that bind them. But equally, it was abundantly clear that Riyadh would not let the politics of the Ukraine crisis spoil Russia’s role in Opec-plus, viewed as vital for market management. Opec also shared a common concern with Moscow over US-led market interventions through sanctions, price caps and stock releases.

Saudi Arabia went on to deepen ties with China during a December visit by Chinese President Xi Jinping, arguing it did not see relations with different partners as a “zero-sum game.” Xi offered a deeper, more balanced relationship than the traditional dynamic with the West. Gulf states also value China's position of non-interference in domestic affairs.

Instead of expecting the Gulf to reinvest petrodollars in China, Xi pledged “all-dimensional energy cooperation,” including investment to help diversify the Gulf’s oil economies in areas such as “clean and low-carbon technologies involving hydrogen, energy storage, wind and photovoltaic power and smart power grids.” China is also interested in developing currency swaps and digital currencies that bypass the dollar (and sanctions), and in payment in yuan for bilateral trade. Hedging would be available via the Shanghai Futures Exchange.

A similar trend is playing out in the United Arab Emirates. That country has emerged as a hub for Russian oil trade, with the dirham also used for some transactions. UAE-China economic ties have been on the rise for years, with growing cooperation in technology, currency and other sectors.

A New Ecosystem

So what does all this mean for energy? The Ukraine war has been a geopolitical inflection point, accelerating the emergence of these new alignments and deepening the multipolar shift. It has also been a market inflection point — ending Europe’s supply of cheap gas, fundamentally reconfiguring global oil and gas flows, and in some jurisdictions giving renewables more impetus.

These two trends are combining to foster a new energy ecosystem, alongside economic and geopolitical relationships. Some aspects of this rewiring are already clear: Oil and gas markets will be more fragmented. Politics will drive inefficient flows, with more Russian oil and gas heading east, as other supplies move to Europe. Asia will, for now at least, enjoy heavily discounted crude — from Russia, Venezuela and Iran — while Europe pays a premium for its oil and gas supplies. Strategic relations will develop between China and the Gulf on low-carbon technologies, and between Europe and the Gulf on oil and LNG. Europe will seek to accelerate its energy transition, to avoid over-dependency on fossil fuel producers. The West will step up efforts to diversify its low-carbon energy supply chain away from China. Russia will remain an important partner in Opec-plus.

The shape of other aspects is still forming. Will Russia’s strategic importance as an energy producer be permanently undermined by Western sanctions, or could it bounce back — helped by the new Asian trading relationship? How far, or quickly, will the Gulf go in embracing the yuan or other currencies for oil and gas trade? Will the reach of Western sanctions be constrained? Could gas take a lasting knock, and renewables, nuclear and coal get a boost, in the name of energy security? One thing is certain: While these and other changes play out, oil and gas markets will remain volatile.

For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact