HOUSTON — The European Union embargo on most Russian oil imports could boost the global economy, fuel a realignment of global energy trade, weaken Russia economically, give China and India bargaining power and producers like Saudi Arabia get richer.
Europe, the United States and much of the rest of the world could suffer as oil prices, which have been rising for months, could rise further as Europe buys energy from more distant suppliers. European companies will have to scour the world for the types of oil that their refineries can process just as easily as Russian oil. There may even be sporadic shortages of certain fuels such as diesel, which is crucial for trucks and agricultural machinery.
In effect, Europe is trading one unpredictable oil supplier – Russia – for unstable exporters in the Middle East.
Europe’s hunt for new oil supplies – and Russia’s search for new buyers of its oil – will leave no part of the world untouched, energy experts said. But it’s difficult to determine the impact on any country or company because leaders, energy managers and traders will respond in different ways.
China and India could be shielded from some of the burden of higher oil prices because Russia offers them discounted oil. In the past few months, Russia has become India’s second largest oil supplier, ahead of other major producers such as Saudi Arabia and the United Arab Emirates. India has several large refineries that can make big profits by refining Russian oil into diesel and other fuels that are in high demand worldwide.
Ultimately, Western leaders are trying to exploit President Vladimir V. Putin’s ability to wreak havoc in Ukraine and elsewhere, refusing him billions of dollars in energy sales. They hope their actions will force Russian oil producers to close wells because the country does not have many places to store oil while attracting new buyers. But the effort is perilous and can fail. If oil prices rise significantly, Russia’s overall oil revenues won’t fall much.
Other oil producers like Saudi Arabia and western oil companies like Exxon Mobil, BP, Shell and Chevron will do well simply because oil prices are higher. The downside is that global consumers and businesses will have to pay more for every liter of fuel and goods carried on trucks and trains.
“It’s a historic, big problem,” said Robert McNally, a former energy adviser to President George W. Bush. “This will reshape not only commercial relations, but also political and geopolitical ones.”
EU officials have yet to release full details of their efforts to crush Russia’s oil exports, but have said the policy will come into effect in months. This is intended to give Europeans time to prepare, but it will also give Russia and its partners time to come up with temporary solutions. It is difficult to say who will adapt better to the new reality.
According to what European officials have said so far, the union will ban imports of crude oil and refined fuels such as diesel by Russian tankers, representing two-thirds of the continent’s purchases from Russia. The ban will be phased in over six months for crude oil and eight months for diesel and other refined fuels.
In addition, Germany and Poland have pledged to stop importing oil from Russia through pipelines, meaning Europeans could cut Russian imports by 3.3 million barrels per day by the end of the year.
And the union has said European companies can no longer insure tankers carrying Russian oil anywhere. That ban will also be phased in over several months. Because many of the world’s largest insurers are based in Europe, that move could significantly increase the cost of shipping Russian energy, although insurers in China, India and Russia can now take over some of that business themselves.
Before the invasion of Ukraine, about half of Russia’s oil exports went to Europe, accounting for $10 billion in transactions per month. Sales of Russian oil to EU member states have declined somewhat in recent months, eliminating those to the United States and Great Britain.
Some energy analysts said the new European effort could help disentangle Europe from Russian energy and limit Putin’s political influence over Western countries.
“There are many geopolitical ramifications,” said Meghan L. O’Sullivan, director of the geopolitics of energy project at Harvard’s Kennedy School. “The ban will engage the United States more deeply in the global energy economy and it will strengthen energy ties between Russia and China.”
Another hope of Western leaders is that their actions will diminish Russia’s position in the global energy industry. The idea is that, despite its efforts to find new buyers in China, India and elsewhere, Russia will generally export less oil. As a result, Russian producers will have to close wells that they cannot easily restart due to the difficulties of drilling and producing oil in inhospitable Arctic fields.
Yet the new European policy was the product of compromises between countries that can easily replace Russian energy and countries like Hungary that cannot easily break or do not want to break their dependence on Moscow. Therefore, 800,000 barrels of Russian oil per day that comes to Europe by pipeline has been excluded from the embargo for the time being.
The Europeans also decided to gradually introduce restrictions on insuring Russian oil shipments because of the importance of the shipping industry to Greece and Cyprus.
Such compromises could undermine the effectiveness of the new European effort, some energy experts warned.
“Why wait six months?” said David Goldwyn, a top State Department official on energy in the Obama administration. “As the sanctions are now configured, the only thing that will happen is that you will see more Russian crude oil and product flows to other destinations,” he said. But he added: “It is a necessary first step.”
The war between Russia and Ukraine and the world economy
A far-reaching conflict. The Russian invasion of Ukraine has had a ripple effect around the world, adding to the stock market woes. The conflict has caused staggering spikes in gas prices and product shortages, prompting Europe to reconsider its reliance on Russian energy resources.
Despite the oil embargo, Europe will likely remain dependent on Russian natural gas for some time, possibly years. That could preserve some of Mr Putin’s power, especially if gas demand peaks during a cold winter. European leaders have fewer alternatives to Russian gas because the world’s other major suppliers of that fuel – the United States, Australia and Qatar – are unable to expand exports substantially quickly.
Russia also has other cards to play that could undermine the effectiveness of the European embargo.
China is a growth market for Russia. Mainly connected by pipelines that are nearly full, China has ramped up its tanker shipments of Russian crude in recent months.
Saudi Arabia and Iran could lose out on those increased Russian sales to China, and sellers in the Middle East have been forced to lower their prices to compete with deeply discounted Russian crude.
dr. O’Sullivan said the relationship between Russia, Saudi Arabia and other members of the OPEC Plus alliance could become more complicated “as Moscow and Riyadh compete to build and maintain their market share in China.”
Even as commercial energy ties are being mixed up, major oil producers like 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. Revenues from Saudi oil exports are soaring and could set a record this year, according to Middle East Petroleum and Economic Publications, which tracks the industry, bringing the kingdom’s trade surplus to more than $250 billion.
India is another beneficiary because it has large refineries that can process Russian crude oil and turn it into diesel, some of which could end up in Europe even if the raw material came from Russia.
“India is becoming the de facto refining center for Europe,” analysts at RBC Capital Markets said in a recent report.
But buying diesel from India will increase costs in Europe, as it is more expensive to transport fuel from India than to have it supplied through Russian refineries. “The unintended consequence is that Europe is in effect importing inflation to its own citizens,” the RBC analysts said.
India gets about 600,000 barrels per day from Russia, up from 90,000 barrels per day last year when it was a relatively small supplier. Russia is now India’s second largest supplier after Iraq.
But India could find it difficult to keep buying from Russia if the European Union’s restrictions on European companies insuring Russian oil shipments increase costs too much.
“India is a winner,” said Helima Croft, RBC’s head of commodities strategy, “as long as they are not hit by secondary sanctions.”