European Oil Imports from Russia: The Umbilical Cord

Ukraine and several EU countries, including Poland and Lithuania, desire a ban on Russian oil and gas, whereas Germany, Hungary and Austria have been reluctant to do it. The German Finance Minister Christian Lindner has said, “We have to put more pressure on Putin, and we have to isolate Russia; we have to cut all economic relationships with Russia, but at the moment, it is not possible to cut the gas supplies.” [2]

The Current Crisis-

Europe pays Russia $850 million per day for energy imports, and currently, it is trying to impose sanctions on the Kremlin's finances due to its invasion of Ukraine. According to researchers at the Bruegel, a think tank in Brussels, the European Union transfers $450 million per day to Russia for oil and $400 million per day for natural gas. The reason why the European Union is split on whether or not to install a ban on Russian oil imports is understandable because Russia supplies a quarter of the EU's oil and more than 40% of its gas. [3] Finding replacements in a matter of days will be nearly difficult, and it will cost the EU nations a lot. The United States and the United Kingdom, on the other hand, rely significantly less on Russia for their energy needs, which becomes easier for them to put a stop to it. Furthermore, Russian President Vladimir Putin has threatened to stop supplying gas to the European Union countries if the EU rejects Russian oil. This makes the debate even more tricky. 

Due to sanctions or importers willingly rejecting Russian shipments, the International Energy Agency has warned that around 3 million barrels per day of Russian oil might be locked in from May onwards. According to Reuters, major global trading firms are expected to reduce crude and gasoline imports from Russia's state-controlled oil corporations in May. Russia's Energy Ministry said that access to its statistics on oil and gas production and exports would also be restricted.

European Union- Russia Oil Imports-

According to the BP Statistical Review of World Energy, Europe is the largest buyer of Russian oil, getting around 138 million tonnes in 2020, or 53% of Russia's total exports of 260 million tonnes. Russia supplies a quarter of Europe's crude oil, which imports practically all of it. Oil is processed into heating and transportation fuels and is a raw resource for the industry. According to the European Central Bank, a 10% gas shortage would result in a 0.7% reduction in GDP in the European Union. A complete ban on Russian energy will almost certainly push the EU into recession. Moreover, the consequences will be felt throughout the world. For instance, the United Kingdom economy will lose about $100 billion, or approximately 3% of its GDP. As a result, oil revenues support the Kremlin's budget and add to foreign currency reserves, even though Western sanctions have targeted Russia's foreign reserves. Between 2011 and 2020, the Russian government received an average of 43% of its revenue from oil and gas. [4]

Natural gas is mainly delivered by pipeline, and finding alternate sources for it is more difficult. However, when it comes to exporting oil, which is primarily transported by tanker and traded internationally, other sources would be easier to come by. This is why natural gas is off the menu, at least for the time being. Heavy consumers such as Germany have warned that a sudden cessation might result in job losses, with industry organisations predicting closures in the glass and metals industries. According to analysts, cutting off natural gas and oil would undoubtedly precipitate a recession in Europe. European states agreed to halt Russian coal imports beginning in August, although this represents a modest portion of Russia's energy payments.

As of 2009, Russian natural gas was distributed to Europe by 12 pipelines: three direct pipelines to Finland, Estonia, and Latvia, four pipelines through Belarus to Lithuania and Poland, and five pipelines through Ukraine to Slovakia, Romania, Hungary, and Poland. The Nord Stream is a network of offshore natural gas pipes in Europe that runs from Russia to Germany beneath the Baltic Sea. It includes the two Nord Stream 1 pipelines, which run from Vyborg in northwest Russia to Finland, and the two Nord Stream 2 pipes, which travel from Ust-Luga to Estonia. Both pipelines connect to Lubmin in Mecklenburg-Vorpommern, Germany's northeastern state. On February 22, 2022, Germany had halted certification of Nord Stream 2 in response to Russia's recognition of the Donetsk and Luhansk People's Republics in the run-up to the Russian invasion of Ukraine in 2022. In 2017, Russia became one of Europe's primary liquefied natural gas suppliers, primarily through Yamal LNG, which began operations in 2017, as well as pipeline deliveries. [5]

US Ban on Russian Oil-

The United States has already prohibited all imports of Russian oil, gas, and energy in March, citing that it is Russia's economy's primary artery. According to a senior source in the Biden administration, the prohibition prevents any new purchases of Russian crude oil, certain petroleum products, liquefied natural gas, and coal and slows the delivery of current purchases already signed for. According to financial analysts, the US is trying to serve the interests of domestic oil interest groups. The US may be seen as wooing its friends to censor Russian exports in order to challenge Russia ideologically. In contrast, in order to serve the interests of domestic oil interest groups, the US buys Russian energy at a lower price and sells it to Europe at a higher price. In the end, it has been stated that Europe suffers as European wealth flows to the United States, bolstering the dollar's edge over the euro.

Consequences Of Russia Stopping Oil Exports-

In principle, European clients might replace barrels from Middle Eastern suppliers, whose most of the exports are present to Asia, as well as barrels from the United States, Latin America, and Africa. Meanwhile, Middle Eastern oil imports to Asia might be replaced by Russian oil, which is cheaper. Global markets, on the other hand, would require time to adjust. Customers in Europe may be scrambling to use rail, truck, and river barge to reverse the regular east-west flow of oil. Refineries producing gasoline and other goods have been built for Russia's specific type of oil. A pipeline from Russia is used by many big refineries. As oil is a worldwide commodity and a net loss of supply from Russia is inevitable, prices for oil would undoubtedly rise, not just for Europe but for everyone. This would result in greater transportation and heating fuel expenses, as well as increased consumer inflation. Russia is a crucial source of diesel fuel for vehicles and farm equipment in Europe; therefore, its price influences the prices of a variety of foods and items.

Due to transportation and logistical restrictions, all of Russia's oil could not be shifted from Europe to Asia. It is unclear how much oil consumers in India and China would be willing to buy Russian oil if it entails probable penalties with the West. The OPEC oil cartel, led by Saudi Arabia and including allied non-members like Russia, has stated that it will not boost output to compensate for any supply loss from Russia as a result of the boycott. In the worst-case scenario, Russia's 3.8 million barrels would be lost to Europe, and other nations would refuse its oil, resulting in a massive price surge to $180 per barrel, followed by a quick drop owing to diminishing demand and economic development. A milder scenario would see a loss of only 1 million barrels per day, with most Russian oil spurned by Europe being scooped up at a bargain in other energy-hungry nations. By June, oil prices would have fallen below $100, and by the end of the year, they would have dropped below $60. [6]

Russia's Options If the Eu Bans Its Oil-

Russia will most likely increase sales to established consumers who are not subject to sanctions, such as China. In terms of oil, China is Russia's most crucial non-European consumer, accounting for the great majority of the 38% of Russian oil shipments to Asia and Oceania in 2021. Russia is now China's second-largest oil supplier, behind Saudi Arabia, but many believe that one of the Kremlin's primary goals in the following years will be to beat its Middle Eastern competitors and become China's primary oil supplier. Another major goal for Moscow will be to expand the number of goods sold to India. India is a country of 1.38 billion people and is the world's third-largest user of oil. India's leading suppliers are Iraq, Saudi Arabia, and the United Arab Emirates, with Russia accounting for only 2% of Indian oil imports in 2021. However, this is already beginning to change. India has not very harshly criticised Russia's activities in Ukraine, and its imports of Russian oil increased considerably in the months of March and April. Many Western nations have spurned Russia's crude; therefore, Indian refiners have been ready to acquire it at substantially discounted prices. However, there are doubts whether both China and India can replace the European demand. We can also talk about Pakistan, as it has neither condemned nor criticized Russia's invasion of Ukraine. Russia and Pakistan have also developed tight gas connections. Russia has agreed to build Pakistan Stream, a $2 billion pipeline that would transport LNG from Karachi, Pakistan's southern port city, to the country's north. 

Conclusion-

In the global energy markets, Russia will no longer be a key participant. Russian energy may even become acceptable on European markets again unless a powerful enough coalition of anti-Russian interest groups, such as coal producers, renewable energy organizations, or LNG producers, can persuade policymakers to steer away from Russian energy in the long run. European countries should be prepared to impose measures to cut fuel usage, such as making public transportation accessible and rewarding car-sharing, according to analysts at the Bruegel. If such restrictions fail, stronger ones, such as licence plate number-based odd-even driving prohibitions, will also be required. Because oil is a worldwide commodity and a net loss of supply from Russia is inevitable, prices for oil would undoubtedly rise, not only in Europe but around the world. This would result in greater transportation and heating fuel expenses, as well as increased consumer inflation. Russia is a key source of diesel fuel for vehicles and farm equipment in Europe; thus, its price has an impact on the prices of a variety of foods and commodities, and it is going to impact the whole economy.

End-Notes-

[1] Reuters. (2022, April 25). Brussels prepares to hit Russia with “smart sanctions” on oil imports, The Times says. Reuters. https://www.reuters.com/world/europe/brussels-prepares-hit-russia-with-smart-sanctions-oil-imports-times-2022-04-25/

[2] Germany rules out immediate end to Russian oil imports. (2022, April 20). BBC News. https://www.bbc.com/news/business-61164894

[3] Amaro, S. (2022, April 5). EU proposes ban on Russian coal, working on oil sanctions. CNBC. https://www.cnbc.com/2022/04/05/european-union-could-ban-russian-coal-imports-sources-say.html

[4] News, A. B. C. (n.d.). EXPLAINER: What’s the impact if Europe cuts off Russian oil? ABC News. Retrieved May 9, 2022, from https://abcnews.go.com/Business/wireStory/explainer-impact-europe-cuts-off-russian-oil-84211772

[5] Bailey, S. (2009). Deutsch: Karte der wichtigsten bestehenden und geplanten russischen Erdgas-Pipelines in Europa.English: Map of the major existing and proposed russian natural gas transportation pipelines in europe. Own work. https://commons.wikimedia.org/wiki/File:Major_russian_gas_pipelines_to_europe.png

[6] Welle (www.dw.com), D. (n.d.). If Europe is done with Russian energy, where will Moscow sell its oil and gas? | DW | 07.04.2022. DW.COM. Retrieved May 10, 2022, from https://www.dw.com/en/if-europe-is-done-with-russian-energy-where-will-moscow-sell-its-oil-and-gas/a-61386880

Pic Courtesy-Adhia Huza at unsplash.com

(The views expressed are those of the author and do not represent views of CESCUBE.)