Europe is struggling to find ways to stop paying Russia $ 850 million a day for energy and affect Kremlin finances for his invasion of Ukraine. Leaders of the 27-member European Union are finding that reversing decades of dependence on Russian oil and natural gas is not an easy task.
The EU is now discussing sanctions on Russian oil, including a possible boycott. Here’s what such a measure could mean for people in Europe and the rest of the world:
How much does Europe pay Russia for energy?
Gas and oil are flowing into Europe even as governments denounce the war. The EU is sending $ 450 million a day to Russia for oil and $ 400 million a day for natural gas, according to estimates by Bruegel think tank analysts in Brussels.
This means that energy revenues are bolstering the Kremlin’s budget, adding to foreign exchange reserves, although Western sanctions have been directed at Russia’s foreign reserves. The Russian government received an average of 43% of its oil and gas revenues between 2011 and 2020.
How much Russian oil goes to Europe?
Europe is the largest buyer of Russian crude oil, receiving 138 million tonnes in 2020 of Russia’s total exports of 260 million tonnes, or 53%, according to the BP Statistical Review of World Energy. Europe, which imports almost all of its crude, receives a quarter of its supply from Russia.
Oil is refined as a fuel for heating and conduction, as well as being a raw material for industry.
Why focus on oil instead of natural gas?
It is more difficult to find alternative sources of natural gas because it comes mainly by pipeline. It would be easier to find other sources of oil, which moves mainly by tanker truck and is marketed worldwide.
At the moment, natural gas is off the table. Large users like Germany say an immediate cut could cost jobs, with industry associations warning of closures of glass and metal companies.
Cutting off both natural gas and oil is likely to cause a recession in Europe, economists say. European governments have agreed to halt Russian coal imports from August, but this is a relatively small share of energy payments to Russia.
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What would happen without Russian oil?
Europe imported 3.8 million barrels a day from Russia before the war. In theory, European customers could replace those barrels from Middle Eastern suppliers, whose exports are now mostly to Asia, as well as oil from the United States, Latin America and Africa. In the meantime, cheaper Russian oil could replace shipments from the Middle East to Asia.
But global markets would need time to make that adjustment. In Europe, customers could struggle to reverse the usual movement of oil from east to west by rail, truck and river barges. Refineries are established that manufacture gasoline and other products for Russia’s particular type of oil. Several major refineries depend on a Russian gas pipeline.
Bruegel think tank analysts say European countries should be prepared to impose measures to reduce fuel consumption, such as free public transport and encouraging car-sharing. If these measures do not work, tougher ones would be needed, such as bans on driving couples based on license plate numbers. Similar measures were taken during the 1973 OPEC oil embargo, when Germany imposed car-free Sundays.
“This would give markets enough time for a structural reorientation away from Russian oil,” analysts said.
Gradual bans during the rest of the year would be a way to avoid shortages. Germany has already said it plans to end Russian oil imports by the end of the year.
Oil prices are likely to rise, not only for Europe but also for the rest of the world, because oil is a global commodity and a net loss of supplies from Russia would be likely. This would lead to higher costs for driving and heating fuel and more inflation for consumers.
Russia is a major European supplier of diesel for trucks and agricultural equipment, meaning its price affects the costs of a wide range of food and goods.
What would happen to the world oil market?
All of Russia’s oil could not be redirected from Europe to Asia due to shipping and logistics limitations. It is unclear to what extent buyers from countries such as India and China would buy Russian oil if this poses potential sanctions problems with the West.
The Saudi-led OPEC oil cartel, which sets production levels with non-member allies such as Russia, has made it clear it will not increase production to offset any loss of supply to Russia due to a boycott. .
“It would be a significant, significant and significant rebalancing of crude oil flows,” said Claudio Galimberti, senior vice president of analysts at Rystad Energy. “From a theoretical point of view, it’s possible. From an operational point of view, it’s more complicated because not everything can be redirected.”
World oil demand was already high as economies recovered from the COVID-19 pandemic and war uncertainties exacerbated the tight market and high prices. U.S. President Joe Biden has ordered the release of the strategic oil reserve to combat rising gasoline prices for Americans, while another 30 nations have also agreed to send more oil to the world market. .
In the worst-case scenario of a loss of 3.8 million barrels of Russia in Europe and other countries rejecting its oil, there could be a sharp rise in price to $ 180 per barrel, followed by a sharp fall due to declining demand and economic growth. However, “it doesn’t look like that,” Galimberti said.
Rystad’s expectation is a loss of 1.5 million to 2 million barrels per day and oil will reach $ 120 to $ 130 per barrel by the end of the year.
A softer scenario, in which most Russian oil rejected by Europe would be reduced by a discount in other energy-hungry countries, would mean a loss of only 1 million barrels per day. 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, with some traders and banks avoiding Russian oil even without sanctions.
“It’s a huge price range, but it reflects the great uncertainty we have about the Russian loss,” Galimberti said.
How much would a boycott cost in Russia?
The price of Russia’s main export to Europe, crude oil from the Urals, has been reduced to a discount of $ 35 per barrel compared to international benchmark Brent. However, due to generally higher oil prices, Russia’s revenue losses have so far been limited. These foreign exchange earnings help bolster Russian finances amid sanctions.
“As long as Russian barrels find a market, Russia is in business,” Galimberti said. “The moment they stop finding the market, it is the time when oil prices soar and Russia will have serious economic problems.”
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