A European ban on most crude imports from Russia will come into effect in December. For EU leaders, the next task at hand has been finding new sources of crude oil ahead of what could be a very dark and cold winter. The move by EU countries to sanction Russia for President Vladimir Putin's unjustified war with Ukraine by halting crude oil imports later this year is an attempt to "make the Kremlin pay" for the invasion, European Commission President Ursula von der Leyen recently said. Though it's only backfired as the Kremlin's war chest has swelled by tens of billions of dollars as energy prices hyperinflate and new buyers are found in Asia.
EU leaders have stepped up efforts to transition from Russian energy to other energy-rich countries, though they might find it challenging to increase energy imports due to limited spare capacity worldwide.
Monica Malik, the chief economist at the Abu Dhabi Commercial Bank, told the audience at an energy security panel hosted by the Institute of International Finance in Washington, DC, on Monday that the Gulf states, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates, won't be able to increase production to replace Russian oil in Europe.
After all, the world is moving into a much tighter oil market for the remainder of the year after OPEC+ cuts. This could unintentionally spur a supercycle in pricing as brent crude inches closer to $100 a barrel.
So where will Europe source crude this winter if spare capacity worldwide is limited? Head of European Oil for Morgan Stanley Martijn Rats wrote in a recent note:
"The oil market is where it is because this question is so hard to answer. If we knew, we could all breathe a little easier."
Without spare capacity -- EU leaders will find it challenging to source crude around the world because production cannot be quickly ramped up.
Related: Natural Gas Prices In Europe Fall To A Three-Month Low
Helima Croft, managing director at RBC Capital Markets LLC, warned, "I think we are facing the worst energy crisis in decades."
Croft fears a populist backlash in Europe as sanctions against Russia has sparked a cost-of-living crisis. This could force some EU governments to focus on affordability. She said the probability of the US making deals with Venezuela or Iran to offset the energy crunch is unlikely.
One top EU diplomat admitted: "Our prosperity has been based on cheap energy coming from Russia."
Europe's energy security is in dire straits as the cold season nears. The problem with limited global capacity and higher energy costs will only strain Europe to the core. This winter, there are risks of power blackouts across the bloc as energy supplies from Russia dwindle -- and the inability to rapidly increase imports from abroad. The UK warned about this scenario days ago.
ADVERTISEMENT
By Zerohedge.com
More Top Reads From Oilprice.com:
- Danish Company To Build World’s Tallest Onshore Wind Turbine
- European Energy Market Spooked By $1.5 Trillion Liquidity Crisis
- Oil Prices Under Pressure As Standard Chartered Lowers Global Demand Forecast
The ban won’t only plunge the EU deeper into its worst energy crisis in its history but could lead to a populist backlash in Europe as sanctions against Russia has sparked a cost-of-living crisis. People are starting to openly protest against their governments sending weapons worth billions of dollars to Ukraine when these billions could help people pay their staggering energy bills and offset rising costs of living. This trend is already gaining momentum among the citizens of the EU and could result in a permanent schism inside the EU.
In a global tight market with robust demand and a fast-shrinking spare production capacity including OPEC+’s, the EU leaders will find it virtually impossible to find alternatives to Russian crude oil.
US shale oil production is stagnant while the Arab Gulf producers including both Saudi Arabia and the UAE won't be able to increase production to replace Russian oil in Europe. Moreover, there is a limit to how much the United States will continue to release oil from its SPR.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert