A man buys the daily paper at the same local news stand every morning. He glances quickly at the front page and then throws the paper away. One day the new stand owner asks him what he’s looking for. When the man replies it’s the obituaries, the stand owner tells him they’re not on the front page. The man replies: “the one I’m looking for will be”.

This week’s post will be a little different. For once we will not be dealing with the cars we love, but rather with what goes into the tank to make them run. This is of course linked to the terrible events happening only a few hundred kms from where you’re reading this if you’re in Europe, and the implications of which will in some areas will be much more far-reaching than I believe is currently realized. Next to cars one of my other big interests is geopolitics, a subject that has been almost forgotten over the last 30 years but which made a sudden re-appearance on the Eastern front a month ago. In the context of what’s currently happening, one of the most important side effects is playing out in the oil market and thereby to the fuel we put in our cars. This week therefore, geopolitics and cars come together to paint a picture that unfortunately, isn’t very bright.

Russia is a major producer of basically everything needed to make the modern world run: oil, natural gas, precious and industrial metals and, together with Ukraine, agricultural commodities. It also produces over half of the world’s ammonia (a derivative of natural gas) and Ukraine and Russia are the world’s second and third largest producers of potash. Both ammonia and potash are used for fertilizer production and have thus become crucial in feeding the world’s growing population. This war will therefore have major implications on the world’s food production, but this is ot the place to deal with those. It’s also no secret that Europe, and especially Germany, have built up a completely irresponsible dependence on Russia for its oil and gas-related energy supplies over the last decades, the downside of which has now become obvious. In parallel the US has developed into the world’s largest oil producer and is today self-sufficient, actually exporting a small part of what is being pumped and fracked. To protect that self-sufficiency, a US export ban on oil could well follow in the coming weeks, perhaps meaning that the effects of what follows below will be less severe for our American friends than for the rest of us.

Europe is currently doing what it can to move away from Russian oil imports, but the room for manoeuvre in the short-term is very limited. There is no over-supply of oil in the world today and basically only Saudi Arabia has any room to increase production by perhaps 1m barrels per day, but only maybe a year from now. The completely bizarre idea of starting importing from the dictatorships of Iran and Venezuela (in other words replacing one dictator by two others) is luckily completely unrealistic as both countries would need massive investments in their run-down production facilities before any exports could occur. This means Europe is stuck, which in a way of course goes completely in the direction of replacing oil with green energy that every European politician talks about. But with oil and gas making up more than half of the EU’s current energy consumption, this is not something that happens in a week, especially when like Germany, you’re set on closing down nuclear at the same time.

Behind the US and Saudi Arabia, Russia is the world’s third largest oil producer and exports around 5 million barrels per day, roughly corresponding to 5% of the world’s daily consumption (but far more of the European consumption). Russian oil fields are mostly located in Western and Eastern Sibiria with the Western fields supplying Europe with oil and gas through two pipelines, as shown above. The Western fields are not connected to the Eastern which mainly supply China. This means oil cannot flow from West to East, for example to be sold on to China (the oils are also of different quality, complicating this further). At current oil prices, the total exports provide Russia with a daily inflow of more than $1bn. Since the start of the conflict a month ago, the EU has paid around EUR 20bn to Russia for oil and gas, neither of which are part of current sanctions. With the war being estimated to cost roughly $1bn per day, that goes a long way to financing the current atrocities.

There is another problem though, and it’s a big one: the Russians are not capable of operating their oil fileds themselves and haven’t done so since the collapse of the Soviet Union. Instead, all the fields have been operated by the Western oil companies which now, with the exception of French TotalEnergies (and we’ll see how long that lasts), have left. The Chinese are roughly as incapable as the Russians at operating oil fields so most probably, what will happen as a consequence of the sanctions and exit of Western companies is that production especially in Eastern Russia will diminish, and thereby also exports to China. That’s bad news for the Chinese economy but unfortunately, for the price we pay at the pump as well.

President Putin is fully aware of the leverage towards Europe the Russian energy constitutes and no one should doubt that he’s also fully capable of turning off the pump altogether, especially if the war effort continues to go as badly as it currently does. Europe could also decide on an oil embargo which would probably be the moral thing to do, but for the reasons mentioned above, is far easier said than done. An embargo or turning off the pump would obviously hurt the Russian economy and thereby ordinary Russians, but as the true dictator he is, don’t expect Putin to care. Realistically therefore, the global oil supply will diminish by a few million barrels over the coming years, which most probably means prices at the pump will go higher. On Thursday this week, some of the world’s leading oil traders joined the ranks of many experts predicting oil barrels to double from here. In Europe it’s still taxes that make up around half of the price at the pump, and we’re already seeing politicians being pressed to reduce taxes or help struggling consumers through subsidies. How much will be done depends on where you are – and how far out the next election is…

It’s therefore fully understandable that many today consider trading in their beloved but perhaps not so economical car against something more efficient, perhaps even a hybrid or an EV. I’m not saying that’s wrong, but remember two things: firstly, your big-block has become far more difficult to trade in than only a few weeks ago, so do your maths to make sure the potential loss in resale value doesn’t exceed the potential fuel savings. Secondly, the supply of new cars is in complete crisis given the continuing disruptions in notably semiconductor and microchip deliveries from China, and many people will have the same idea as you right now. Economical used cars are therefore on the rise, and It could be long before you see your new car, whatever the dealer promises. Finally, anything with a battery is dependant on precisely the industrial metals that to a large extent also come out of Russia, and as a consequence of this whole mess, both these and electricity prices will increase. As so often, there’s no free lunch.

The invasion of Ukraine is a terrible tragedy of a kind most of us Europeans thought we would never have to witness again. The fact that we have to pay more at the pump obviously quickly fades in comparison to the enormity of the war for Ukraine and its people. As everyone else I truly hope that this will be over sooner rather than later, but the path to that happening is currently difficult to see. And with regards to oil and other commodities, the lifting of sanctions not only rely on Russia going home, but on Putin stepping down or being removed from power. Although we all wish that would happen soon, or indeed to read the headline the man in the quote at the beginning of this post is looking for, that seems unlikely at this stage. So whilst we may swear at the price we pay at the pump, let’s not forget that at the same time, the Ukrainians have far worse things to swear about.