[Choi Ji-woong's Energy War] Deglobalization and the Energy Supply Dilemma

[Asia Economy] Amid the Ukraine war and the US-China rivalry, it can be predicted that globalization will retreat and the emergence of bloc economies will accelerate. However, globalization enabled national division of labor based on comparative advantage and allowed the use of the cheapest raw materials regardless of nationality. Therefore, the force to maintain globalization is as strong as the force driving deglobalization. These two forces collide most strongly in the energy sector. The problem is that this clash leads to increased costs.

Since December last year, the United States and the European Union (EU) have imposed a price cap of $60 per barrel on Russian crude oil as a sanction. However, in January, Russia’s crude oil exports increased by about 14% compared to the previous month, as if mocking the sanctions. The country that imported the most Russian crude oil was India. India shares the same goal as the US in containing China. Therefore, it participates as a member of the Quad, a US-led consultative group. Although the two countries are strengthening their strategic alliance, this is not the case in the energy sector. India recorded a high economic growth rate of 6.8% last year. Economic growth is impossible without a stable energy supply. For India, economic growth and the stability of people’s livelihoods take precedence over any other value. Therefore, it is difficult to request India to stop purchasing Russian energy through any diplomatic or political deal. The US is effectively tolerating India’s purchase of Russian crude oil.

Japan also resumed imports of Russian crude oil from December last year. Around the same time, the West imposed sanctions on Russian crude oil, but Japan requested the US and EU to exempt Sakhalin crude oil from the price cap. Despite criticism that this could be a source of funding for Russia’s war efforts, Japan made a decision prioritizing energy security. Japan also decided to remain involved in the Sakhalin-1 and Sakhalin-2 projects, in which Japanese companies participate. While major resource developers in Sakhalin such as ExxonMobil and Shell withdrew, Japan continues to maintain cooperative projects with Russia. Japan’s foreign policy foundation is the US-Japan alliance, and as a member of the G7, Japan has followed the international political trends led by the West. However, in the energy sector, it is not keeping pace.

Germany also pursued a policy prioritizing stable energy imports over international politics. About three months before the outbreak of the Ukraine war, in November 2021, the Nord Stream 2, a large gas pipeline connecting Germany and Russia, was completed. During its construction, former US President Donald Trump strongly opposed it, saying, “Germany is voluntarily becoming a hostage of Russia.” However, Germany could not give up direct imports of Russian gas.

When globalization and deglobalization collide, securing energy resources can become a precarious tightrope walk between international conflict and cooperation. Recently, the rise in energy costs such as electricity and heating bills is partly due to conflicts. South Korea, the world’s fourth-largest crude oil importer, inevitably faces the lines drawn by international politics. Unlike India and Japan, South Korea has been complying well with US and EU sanctions. It stopped importing Russian crude oil from the second half of last year and halted Iranian crude oil imports since 2020 in accordance with US sanctions on Iran. However, major consumers show that complete deglobalization in the energy sector is impossible. It only increases costs. Since future conflicts can determine costs, long-term and strategic considerations are needed for both energy consumption and supply, rather than short-term price fluctuations.

Choi Ji-woong, Researcher, Smart Data Center, Korea National Oil Corporation