It isn’t easy to reverse decades of dependence upon Russian oil and natural gases, according to the 27-member European Union.
Now, leaders are discussing sanctions against Russian oil and a possible boycott. This is what this could mean for Europeans and others around the globe.
EUROPE PAYS RUSSIA HOW MUCH FOR ENERGY
Even though governments are condemning the war, oil and gas continue to flow to Europe. According to calculations made by the Bruegel think-tank in Brussels, $450 million a days is sent to Russia for oil and 400 million a day for natural gas.
This means that energy revenue is helping to boost the Kremlin’s budget and adding foreign currency reserves, even though Western sanctions have hit Russia’s overseas reserves. Between 2011 and 2020, the average Russian government received 43% of its oil and gas revenues.
WHAT RUSSIAN OIL GOES TO EUROPE?
According to the BP Statistical Review of World Energy, Europe is the largest purchaser of Russian crude oil, with 138 million tonnes of Russia’s total exports of 260 millions tons. This amounts to 53%. Europe imports nearly all its crude oil from Russia, but only 25% of its requirements are met by Russia.
Oil can be used to make heating oil and for driving, as well as being a material for the industry.
WHY IS OIL IMPORTANT OVER NATURAL GAS?
Because natural gas is primarily transported by pipeline, it’s more difficult to find other sources. It would be simpler to locate other sources of oil. Oil is mostly transported by tanker and traded worldwide.
For now, natural gas is not on the table. Germany is a heavy user of natural gas and a cutoff would result in job losses. Industrial Associations warn that there could be a shutdown in metals and glass businesses.
Economists believe that cutting off oil and natural gas would lead to a recession in Europe. Although European governments have agreed to stop Russian coal imports beginning in August, this is only a small portion of energy payments to Russia.
WHAT HAPPEN IF RUSSIAN OIL SUPPLIES QUIT?
Before the war, Europe imported 3.8million barrels per day from Russia. The theory is that European customers could take over barrels from Middle East suppliers, whose exports are mainly to Asia and the United States. In the meantime, oil from Russia could replace Middle East oil shipments to Asia.
Global markets would need to adjust, but it could take some time. Customers in Europe might have to work quickly to reverse the normal east-west movement for oil via rail, truck, and river barge. Russia’s oil is used to make gasoline and other products. Many major refineries rely on the Russian pipeline.
The Bruegel think-tank analysts say that European countries should be prepared to impose measures to reduce fuel consumption, including making public transport completely free and encouraging car-sharing. If these measures fail to work, more severe ones like odd-even driving bans that are based on license plates numbers will be necessary. Similar measures were taken by Germany during 1973’s OPEC oil embargo. Germany imposed Sunday car-free days.
Analysts stated that this would allow markets to reorient away from Russian oil in a structural way.
One way to stop shortages is to impose a ban on oil imports for the remainder of the year. Germany already stated that it will end Russian oil imports by the end of this year.
Oil prices would rise, not only for Europe, but also for everyone. Russia is a global commodity, so a net decrease in supplies would be probable. This would lead to higher fuel and driving costs and more consumer inflation.
Russia is a major supplier to Europe of diesel fuel for trucks, farm equipment and other vehicles. This means that its price can affect the prices of a wide variety of goods and food.
WHAT HAPPEN IN THE GLOBAL OIL SALE MARKET?
Due to logistical and shipping constraints, Russia’s oil could not be diverted from Europe to Asia. If there were possible sanctions problems with the West, it’s not known to what extent buyers from India and China would purchase Russian oil.
Saudi Arabia’s OPEC oil cartel, which sets production levels alongside allied non-members such as Russia, has made it clear that it will not increase output to compensate for any Russian supply losses.
Claudio Galimberti (senior vice president for analysis at Rystad Energie), stated that “it would be a major major, major and major rebalancing crude flows.” It’s theoretically possible. It’s not possible to redirect everything.
As economies recovered from the COVID-19 Pandemic, global demand for oil was already high. However, uncertainties about the war only exacerbated tight markets and high prices. To combat rising gasoline prices, the U.S. President Joe Biden has ordered the release of the strategic petroleum reserve. Additionally, 30 other countries have committed to sending more oil to the global marketplace.
A loss of Russia’s 3.8million barrels to Europe or other countries refusing to buy its oil could lead to a dramatic price rise to $180 per barrel. This would be followed by sharp falls due to economic growth and declining demand. Galimberti stated that it does not appear like this will be the case.
Rystad expects a loss between 1.5 million and 2 million barrels per hour, with oil reaching $120-$130 per barrel by the end of the year.
The milder scenario in which the majority of Russian oil that Europe has shunned is bought up at a discount by other energy-hungry nations would result in a loss only 1 million barrels per daily. Oil prices would fall below $100 in June, and continue to fall to $60 by the end of the year. This is not far from the current situation. Some traders and banks are avoiding Russian oil, even if there aren’t sanctions.
Galimberti stated that although it is a large price range, it is reflective of the uncertainty surrounding the Russian loss.
WHAT IS THE VALUE OF A BOYCOTT IN RUSSIA?
Russia’s main export benchmark, Urals crude oil, has seen a 35-per-barrel discount to Brent, an international benchmark. Russia has not suffered any revenue losses due to higher oil prices. These foreign currency earnings help to support Russian finances in the face of sanctions.
Galimberti stated that Russia is in business as long as Russian barrels are found a market. “If they don’t find a market, then oil prices will rise and Russia will face serious economic problems.”
