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Consequences of the EU’s Russian oil ban

Analysts say the EU’s ban on Russian oil does not create much volatility but only reinforces oil flows that have changed recently.

During the 1970s, Arab states used “petroleum weapons” to punish Western governments for supporting Israel. On May 30, it was the turn of the European Union to use the weapon as part of its latest round of sanctions against Russia.

“United to ban the import of Russian oil into the European Union (EU.) This will take effect immediately on two-thirds of oil imports from Russia, cutting off huge financial resources for their war machine. . Apply maximum pressure on Russia to end the conflict,” European Council (EC) President Charles Michel wrote on Twitter the night of May 30 after the EC summit meeting in Brussels, Belgium.

Specifically, the EU decided to ban purchases of Russian crude oil and refined petroleum products, such as diesel, by the end of this year. The EU said there would be a “temporary” exemption for oil transported through the pipeline. Brent oil prices rose above $120 per barrel after the news – the highest level since March – before cooling slightly to around $117 per barrel.

Graphic image of an oil pipeline valve placed on the EU flag (left) and Russian flag (right).  Photo: Reuters

Graphic image of an oil pipeline valve placed on the EU flag (left) and Russian flag (right). Photo: Reuters

In principle, this decision makes a lot of sense. In addition to being a demonstration of solidarity and willingness to suffer economic damage to punish Russia, the EU also sees the severance of one of the few remaining commercial ties with the Kremlin. The EU, which buys about half of Russia’s oil exports, is one of the country’s most lucrative sources of foreign currency earnings.

However, there are reasons to be skeptical about how much this move will cost Russia foreign currency. First, the ban only applies to oil transported by sea. That is the price of unity. The exclusion of pipeline oil is necessary to reach a compromise with Hungary, which is both more sympathetic to Russia than most EU countries and heavily dependent on the Soviet-era Druzhba pipeline. Hungary imports about 65% of its crude oil from Russia.

As a result, the ban will likely have a limited impact on the oil market and may not create too much volatility. Because, earlier oil tankers refused to carry goods to Russia because they were worried about their reputation being affected. At the same time, Western financiers have also refused to cover contracts for the transportation of Russian oil. Marine insurers based in Russia’s allies could be a partial replacement, but they have much more limited financial capacity.

A big question is whether Russian crude, once sanctioned, can be sold. So far, Russia’s oil exports have risen to more than pre-sanctions levels. Most of Russia’s crude oil exports go to India, which has not enacted sanctions, according to analysts at JPMorgan Chase.

Pavel Molchanov, an analyst at investment bank Raymond James (USA), said that since the EU only bans Russian oil from shipping by ship, at least for now the global market can adjust by rerouting road shipments. sea.

Accordingly, instead of transporting oil to European countries, Russia will boost shipments to other markets such as China, India and Turkey. In return, those countries will buy less oil from the Middle East, leading to more oil from the region flowing to Europe. In the end, it got back in there or was almost the same as the original supply, only the flow was different.

Another question is whether Europe will eventually ban Russian pipeline oil. Poland and Germany intend to stop importing through the Druzhba pipeline. However, it is unlikely that Hungary would agree. Hungarian Prime Minister Viktor Orban has shown his willingness to block EU decisions. Thanks to Russia’s Urals oil, which has dropped significantly in price compared to Brent, Mol – a Hungarian oil corporation – reported soaring profit margins.

But the EU embargo is only part of the reason why oil prices have skyrocketed. The fundamental problem is that the capital market supply is tightening. Demand for the fuel surged as the pandemic subsided, with consumers starting to drive and fly again. China’s easing of anti-epidemic restrictions in recent days has also increased the thirst for oil.

Meanwhile, OPEC and its allies including Russia (OPEC+) show little sign of wanting to increase output. At its meeting on June 2, OPEC+ is not expected to announce any changes with its plan to gradually increase supply to pre-pandemic levels.

The combination of tight supply and increased demand results in higher prices for consumers. Worse, a shortage of refinery capacity in the US has sent gasoline and diesel prices soaring. Francisco Blanch, Head of Commodities and Derivatives at Bank of America Global Research, also pointed out that a stronger dollar also adds costs to Europe and emerging markets.

All in all, none of this is welcome news in an already inflationary environment. According to figures released on May 31, inflation in the euro area in May rose to 8.1 percent, higher than economists expected.

The Arab embargoes of the 1970s caused short-term pain for the West, but also fueled a fuel-saving incentive that led them to eventually reduce their dependence on oil. Today’s European governments can also hope that the short-term pain for consumers is worth the long-term gains in energy security.

Session An (According to The Economist, Washington Post)

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