The oil embargo that the European Union is planning to impose on Russia has become the news of the month. And it has not been finalized yet, with little likelihood that it will be finalized anytime soon—at least in the form Ukraine wants it. Because the EU gets a quarter of its oil from Russia. The European Union, along with the United States, unleashed a barrage of sanctions against Russia following its invasion of Ukraine. While Russia's oil and gas industry has been an obvious target for sanctions, just as it was in Iran and Venezuela, so far, the only action taken was by the U.S. and the UK, which both announced bans on Russian oil imports—neither of which was to take effect immediately.
The EU has been the object of particularly intensive pressure from the Ukrainian government to target Russia's oil and gas, and it has, based on public statements by various officials, made commitments to do that at some later date. Meanwhile, Russia continues to sell both oil and gas to the whole of Europe, even though many European oil buyers have self-sanctioned and reduced their purchases of Russian hydrocarbons.
Even without an oil embargo, the Russian oil industry is already feeling the impact of the sanctions, according to various reports. President Putin himself admitted that the sanctions have affected the normal operation of the industry, saying Russia needed to re-orient its oil flows from Europe to Asia.
Yet just how severe the blow has been—and how severe a blow a full oil embargo from the EU will be—remains unclear. This week, one of the most vocal Kremlin critics, Mikhail Khodorkovsky, said that "If Putin has to redirect oil and gas exports from the European to the Asian markets, he will lose over half of his revenue," as quoted by Insider.
"Would he be able to continue the war and for how long would he be able to continue the war under those circumstances? It is difficult for me to say," Khodorkovsky also said. "But I think it would be a very serious blow."
Related: EU Steps Up Purchases Of U.S. Oil
Of course, it would have been surprising for an individual as critical of Moscow's policies as Khodorkovsky is to have anything else to say about Russia's vulnerability to an oil embargo. It would also be surprising to expect the Russian authorities to admit the full extent of a potential blow from an oil embargo. The key, however, is not in the absolute effect of such an embargo. It is in the relative effect an oil embargo would have on the EU.
Russia is the world's third-largest producer of crude oil and the largest exporter of both crude and oil products. Before the first waves of sanctions hit it, more than half of Russia's oil exports were going to the EU. Since then, the amount of Russian oil going to the EU has declined and, according to the International Energy Agency, will decline a lot further next month, reaching 3 million bpd because of well shut-ins.
Naturally, such a substantial decline in production will be felt in Moscow, and the feeling will not be pleasant. Yet a full—and, more importantly, immediate—embargo on Russian oil will be felt even more unpleasantly in the EU because alternative suppliers will need time to step in and replace the Russian crude.
European governments are already putting measures in place to help their populations cope with higher energy prices, including higher fuel prices. Substantial discounts on gasoline and diesel prices have been implemented in France, Germany, Italy, and Spain, for example. The Netherlands, meanwhile, reduce the rate of its excise duty to alleviate the pain at the pump.
All this will seem like nothing if a full embargo comes into effect. More importantly, the EU will need to find a replacement for those more than 3 million bpd in crude and fuels, and find it fast. It is already buying up U.S. oil, but it will need to step up these purchases significantly and quickly, which would be difficult to do, especially the latter part; there is no pipeline running under the Atlantic. And this is precisely why the EU has not yet agreed on a full oil embargo on Russia.
ADVERTISEMENT
By Irina Slav for Oilprice.com
More Top Reads From Oilprice.com:
- Can Colombia’s Offshore Oil Potential Rival That Of Brazil?
- Uncertainty Leaves Oil Prices Stuck At $100
- The West Is Becoming More Competitive In The Battery Boom
There is not one single oil producer in the world or a group of producers including OPEC+ and US shale oil that can replace 8.0 mbd of Russian oil and products exports or even half of that now or in the next 20 years. OPEC+ has a very small spare production capacity and shale oil is a spent force.
The EU imports an estimated at 4.2-5.6 mbd or 30%-40% of its needs from Russia. If a full oil embargo is imposed on Russia by the EU, Brent crude would head towards $140-$150 a barrel since there will be no replacement for Russia's embargoed oil in the current tight oil market. Moreover, Russia will be able to sell the bulk of its oil exports to China, India and scores of other countries and also to Western oil traders.
A simple calculation will show that Russia won’t lose over half of its revenue as claimed by a bitter Kremlin critic, Mikhail Khodorkovsky, who has vested interest in falsifying things. Therefore, his claim could be discounted easily.
Before the Ukraine conflict, Brent crude price averaged $69 a barrel in 2021. Selling 8.0 mbd at $69 would have earned Russia an annualized revenue of $201.48 bn in 2021. If a full EU embargo is imposed, Russia will still be able to sell at least half of its oil exports in the Asia-Pacific region and also to some Western oil traders at a much higher Brent crude price of $140 thus earning it an annualized revenue of $204.40 bn or 1.4% higher than its pre-Ukraine earning from selling 8.0 mbd.
This is based on a hypothetical assumption that Russia won’t be able to sell its EU-embargoed oil supplies somewhere else. In a tight market like our present one, Russia will have no problem selling its EU-embargoed oil elsewhere.
Let’s now calculate the financial damage to the EU. Assuming that the EU manages to find a replacement to the embargoed Russia oil, it will have to pay $255.5 bn or an extra $65 bn. But the EU’s losses will go far beyond this. The impact of the price rise on the EU economy will plunge it in a far more damaging energy crisis than the one enveloping it now and will reduce its economic growth in 2022 to zero.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
Some people like authoritarian governments. All the better if an authoritarian government is up to its chest in manly fossil fuel.