Europe's extreme dependency on Russian energy products from oil to natural gas is made clear recently from the manner in which they have approached sanctions – with incrementalism, slowly sinking back into the bushes. The latest agreement among member nations on export bans targeting Russia is largely oil focused, not natural gas focused, with the union demanding an immediate 70% decrease in Russian oil transferred BY SHIP. Oil transferred by pipeline will continue to flow into the EU for now. The ban is intended to expand to 90% of all shipborne Russian oil by the end of this year. Natural gas imports from Russia will also continue.
While some European nations are more dependent on Russian energy than others, overall 40% of the EU's needs are supplied by the country's industry. It is not surprising that they are seeking an incremental approach to sanctions, they simply would not be able to survive another winter if they were to go cold turkey and block Russian imports completely. Of course, this does not mean that Russia has to operate on Europe's timetable.
Related: The U.S. Desperately Needs To Revamp Its Energy Policies
Russia is already reducing exports of natural gas to multiple EU countries, with Denmark, Netherlands, and Germany being the latest to see losses. The EU's ban was oil and ship focused because they cannot find an alternative source for natural gas that would resolve shortages if they banned everything. Germany in particular would be destroyed by the loss of natural gas supplies from Russia with its 42% dependency.
The solutions offered by governments and in the mainstream media neglect certain realities. Namely, they claim that output can be increased or diverted to Europe to fill the gap. Joe Biden has suggested that the US is a “net exporter” of oil (this advantage has swiftly declined since he entered the White House according to the IEA) and that the US could help alleviate European demand. The IEA and OPEC members like Saudi Arabia have offered to increase market availability and output of oil if Russian exports are hit with sanctions.
The problem is that increased production is a fantasy stifled by the realities of labor shortages, increased drilling costs due to inflation and shortages in raw materials caused by supply chain disruptions. There is little chance that production capacity will ever be able to match EU demands, according to experts in the drilling industry.
So what does this mean?
It means that in order for Europe to fulfill its energy needs while banning its primary import source, the union will have to leach existing supplies from the global market. In other words, supplies will be greatly reduced in the West and prices are about to spike exponentially in order to feed the EU.
Despite all of this economic bluster, Russia has shown considerable resilience to sanctions on oil as both China and India have increased purchases in tandem with Europe's bans. The wider implication of this is that Europe and the West will be facing reduced global oil supplies and paying a premium while countries like China and India will be enjoying increased supplies and lower prices from Russia.
More Top Reads From Oilprice.com:
- Biden Administration Considers A Windfall Tax On Oil And Gas Profits
- There’s No Immediate Cure For Sky-High Gasoline Prices
- Soaring Diesel Prices Could Accelerate The Electric Vehicle Boom
1- The EU is dependent on Russian oil and gas for 30% and 45% respectively for its needs.
2- Russian gas and oil supplies are irreplaceable now or for the foreseeable future.
3- Every time the EU and other Western countries talk of more sanctions on Russian oil or gas exports, the prices of both shoot up higher.
Russia isn’t short of buyers. China and India the world’s largest and third-largest economies based on purchasing power parity (PPP) who account between them for 26% of globally-traded oil are competing with each other for Russian oil. Their energy market is far bigger than the EU. Therefore, they can easily absorb the EU unwanted Russian crude imports.
And while the EU and other Western countries continue to pay crippling energy bills, Russia is raking in cash with the ruble surging in value against other major currencies and Russian trade surplus is projected to rise from $120 bn in 2021 to $150-$160 bn in 2022.
Moreover, the harshest and most comprehensive Western sanctions against Russia have failed miserably. The reason is that Russia is a net exporter of both energy, key foodstuffs and many rare and precious metals essential for the running of the global economy. Another reason is Russia’s strong trading relations with both China and India. This has ensured that plenty of foreign currency is flowing into Russia. For instance, Russia’s trade with China for has mushroomed from $13 bn in 2011 to more than $150 bn in 2022.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
We likely will be paying more for energy as a result of Russia invading Ukraine, and Europe pushing back against Russia by avoiding Russian energy. So be it. This Russia-Ukraine situation is serious business.
A recent poll suggests that gas prices are number 3 on voter concern. Yes, gas prices impact us in a big way. But I think this is one of those situations where we know we are in for higher prices. The same thing would happen if Iran attacked Saudi Arabia or Israel. Also, if the world got serious about slowing global warming and paying for pollution today instead of tomorrow some time, prices would go up for some time.
Face it, oil is just one of those commodities where prices are sensitive to what all is going on in the world. Petroleum prices usually go up for good reason. I think higher oil prices are to be expected if we are to take a position against Russian aggression.