Europe’s Russian Oil Ban Could Mean a New World Order for Energy

HOUSTON — The European Union’s ban on most Russian oil imports will have a new impact on the world economy, weakening Russia economically, empowering China and India, and producing producers like Saudi Arabia. It has the potential to drive a restructuring of the global energy trade that enriches it.

As Europe buys energy from distant suppliers, oil prices, which have been rising for months, could rise further, which could afflict Europe, the United States, and many other parts of the world. there is. European companies need to scrutinize the world for grades of oil that their refineries can process as easily as Russian oil. There may even be a sporadic shortage of certain fuels, such as diesel, which are important for trucks and agricultural equipment.

In effect, Europe trades volatile exporters in the Middle East with Russia, an unpredictable oil supplier.

According to energy experts, Europe’s search for a new oil supply, and Russia’s search for a new buyer for that oil, will not affect any part of the world. However, leaders, energy executives, and traders respond in different ways, making it difficult to understand the impact on countries and businesses.

China and India may be protected from the burden of soaring oil prices as Russia offers discounted oil. In recent months, Russia has become India’s second largest oil supplier, surpassing other major producers such as Saudi Arabia and the United Arab Emirates. There are several large refineries in India, and you can make a lot of profits by refining Russian oil, which is in high demand all over the world, into diesel and other fuels.

Ultimately, Western leaders aim to undermine the ability of President Vladimir Putin to cause havoc in Ukraine and elsewhere by refusing to sell billions of dollars in energy. They hope their move will force Russian oil producers to close wells. This is because the country does not have much space to store oil while lining up new buyers. However, that effort is dangerous and can fail. If oil prices rise significantly, Russia’s overall oil revenues may not fall that much.

Other oil producers like Saudi Arabia and western oil companies like ExxonMobil, BP, Shell and Chevron are doing well just because of high oil prices. On the other hand, consumers and businesses around the world have to pay more for each gallon of fuel and commodities transported by truck or train.

“This is a historic and big deal,” said Robert McNally, a former energy adviser to President George W. Bush. “This will reshape not only commercial relationships, but also political and geopolitical relationships.”

EU officials have not yet released all the details of Russia’s efforts to curb oil exports, but said these policies will come into effect over the next few months. This means giving Europeans time to prepare, but it will also give Russia and its partners time to devise workarounds. It is difficult to know who adapts well to the new reality.

European officials have said so far that the union will ban Russian tanker imports of refined fuels such as crude oil and diesel, which is equivalent to two-thirds of continental purchases from Russia. The ban will be phased in for at least 6 months for crude oil and at least 8 months for diesel and other refined fuels.

In addition, Germany and Poland have promised to stop the pipeline’s import of oil from Russia. This means that Europeans will be able to reduce Russia’s imports by 3.3 million barrels a day by the end of the year.

And the union said European companies are no longer allowed to insure tankers that carry Russian oil everywhere. The ban will also be phased in over several months. Many of the world’s largest insurers are based in Europe, so it is possible that Chinese, Indian and Russian insurers themselves will get part of their business, but the move is to transport Russian energy. It can significantly increase costs.

Prior to the invasion of Ukraine, about half of Russia’s oil exports were directed to Europe, which is equivalent to $ 10 billion in transactions per month. Sales of Russian oil to EU member states have declined somewhat in the past few months, eliminating sales to the United States and the United Kingdom.

Some energy analysts said the new European efforts could help free Europe from Russia’s energy and limit Putin’s political influence over Western nations.

“There are many geopolitical implications,” said Megan L. O’Sullivan, director of the Harvard Kennedy School’s Energy Geopolitics Project. “This ban will draw the United States deeper into the world’s energy economy and strengthen energy relations between Russia and China.”

Another hope of Western leaders is that their move will undermine Russia’s position in the global energy industry. The idea is that Russia will export less oil overall, despite efforts to find new buyers in China, India and elsewhere. As a result, Russian producers need to close their wells, which cannot be easily reopened due to the difficulty of drilling and producing oil in the difficult-to-live Arctic Circle.

Still, the new European policy is a compromise between a country that can easily replace Russia’s energy and a country like Hungary that cannot or does not want to easily break its dependence on Moscow. It was a product of. As a result, 800,000 barrels of Russian oil per day sent to Europe by pipeline is currently exempt from the embargo.

Europeans have also decided to phase out restrictions on Russia’s oil transport guarantees due to the importance of the shipping industry to Greece and Cyprus.

Such compromises could undermine the effectiveness of the new European efforts, some energy experts warned.

“Why wait six months?” Said David Goldwin, the Obama administration’s highest State Department energy official. “Since sanctions are currently in place, it will only increase the flow of Russian crude oil and products to other destinations,” he said. But he added, “it’s the first step needed.”

Despite the oil embargo, Europe will continue to rely on Russia’s natural gas for some time, perhaps years. This could maintain some of Putin’s leverage, especially if gas demand surged during the cold winter months. European leaders have few alternatives to Russian gas, as the world’s other major suppliers of fuel, the United States, Australia and Qatar, cannot significantly increase exports.

There are other playable cards in Russia that could undermine the effectiveness of the European embargo.

China is a growing market for Russia. China is mainly connected by a pipeline close to its production capacity and has increased Russian crude oil tanker shipments in recent months.

Saudi Arabia and Iran could lose from the increase in Russian sales to China, forcing Middle Eastern sellers to lower prices to compete with significantly discounted Russian crude.

Dr. O’Sullivan said the relationship between Russia, Saudi Arabia, and other members of the OPEC Plus Alliance could be more complicated as “Moscow and Riyadh compete to build and maintain market share in China.” Said there is.

Despite the collapse of commercial energy ties, major oil producers such as Saudi Arabia and the United Arab Emirates have generally benefited from the war in Europe. Many European companies are now eager to buy more oil from the Middle East. Saudi Arabia’s oil export revenues are rising and could set a record this year, pushing the kingdom’s trade surplus to more than $ 250 billion, according to the Middle East Oil Economy Publishing, which is tracking the industry.

India is another beneficiary because it has a large refinery that can process Russian crude oil into diesel. Some of them can reach Europe even if the raw materials come from Russia.

“India is becoming the de facto refining hub in Europe,” an analyst at RBC Capital Markets said in a recent report.

However, buying diesel from India is more costly in Europe because it is more expensive to ship fuel from India than to pipe it from a Russian refinery. “The unintended consequence is that Europe is effectively importing inflation into its people,” RBC analysts said.

India has acquired about 600,000 barrels per day from Russia, up from 90,000 barrels per day last year, which was a relatively small supplier. Russia is currently the second largest supplier in India after Iraq.

However, India may find it difficult to continue buying from Russia if the European Union’s restrictions on European companies that guarantee Russia’s oil transport raise costs too much.

“India is the winner, says Helima Croft, RBC’s Head of Product Strategy, unless it is hit by secondary sanctions.”