A Russian oil embargo in Europe could mean a new world energy order

HOUSTON – The European Union’s ban on most Russian oil imports could trigger a new shock in the global economy, leading to a reorganization of global energy trade that makes Russia economically weaker, gives China and India negotiating power and enriches producers like Saudi Arabia.

Europe, the United States and much of the rest of the world may suffer because oil prices, which have been rising for months, could rise further as Europe buys energy from distant suppliers. European companies will have to scour the world for grades of oil that refineries can process as easily as Russian oil. There may be intermittent shortages of some fuels such as diesel, which is critical for trucks and farm equipment.

Indeed, Europe trades one unpredictable oil resource – Russia – to two unstable exporters in the Middle East.

Europe’s hunt for new oil supplies – and Russia’s quest to find new buyers for its oil – will not leave any part of the world untouched, energy experts said. But figuring out the impact on each country or company is difficult because leaders, energy executives, and traders will respond in different ways.

China and India can be shielded from some of the burdens of higher oil prices because Russia is offering them discounted oil. In the past two months, Russia has become the second largest supplier of oil to India, overtaking other major producers such as Saudi Arabia and the United Arab Emirates. India has many large refineries that can make huge profits by refining Russian oil into diesel and other fuels that are in great demand all over the world.

Ultimately, Western leaders aim to weaken President Vladimir Putin’s ability to wreak havoc in Ukraine and elsewhere by depriving him of billions of dollars in energy sales. They hope their moves will force Russian oil producers to close wells because the country does not have many places to store oil while lining up with new buyers. But this effort is risky and could fail. If oil prices rise significantly, Russia’s total oil revenues may not fall much.

Other oil producers like Saudi Arabia and Western oil companies like ExxonMobil, BP, Shell and Chevron will do well just because oil prices are higher. The flipside is that global consumers and businesses will have to pay more for every gallon of fuel and goods shipped in trucks and trains.

“It’s a historic big deal,” said Robert McNally, energy adviser to President George W. Bush. “This will reshape not only trade relations, but political and geopolitical relations as well.”

European Union officials have not yet disclosed every detail of their efforts to silence Russian oil exports, but they said the policies would be in place over a period of months. This is intended to give the Europeans time to prepare, but it will also give Russia and its partners time to devise alternative solutions. It is difficult to know who will adapt best to the new reality.

European officials have said so far, the union will ban Russian tankers’ imports of crude oil and refined fuels such as diesel, which account for two-thirds of the continent’s purchases from Russia. The ban will be implemented in phases over six months for crude and eight months for diesel and other refined fuels.

In addition, Germany and Poland pledged to stop importing oil from Russia through the pipeline, which means that Europeans could reduce Russian imports by 3.3 million barrels per day by the end of the year.

The union said European companies would no longer be allowed to secure tankers carrying Russian oil anywhere. This ban will also be implemented gradually over several months. With many of the world’s largest insurers based in Europe, the move could raise the cost of Russian energy shipping significantly, although insurers in China, India and Russia themselves may now do some of this work.

Before the invasion of Ukraine, nearly half of Russia’s oil exports went to Europe, representing $10 billion in transactions per month. Sales of Russian oil to European Union members have fallen somewhat in the past few months, and sales to the United States and Britain have been cancelled.

Some energy analysts said the new European effort could help decouple Europe from Russian energy and reduce Putin’s political influence over Western countries.

“There are many geopolitical ramifications,” said Megan L. O’Sullivan, director of the Energy Geopolitics Project at Harvard’s Kennedy School. “The embargo will draw the United States deeper into the global energy economy, and will strengthen the energy links between Russia and China.”

Another hope of Western leaders is that their moves will reduce Russia’s standing in the global energy industry. The idea is that despite its efforts to find new buyers in China, India and elsewhere, Russia will export less oil overall. As a result, Russian producers will need to close wells, which they will not be able to easily restart due to the difficulties of oil exploration and production in the inhospitable Arctic fields.

However, the new European policy was a product of compromises between countries that could easily replace Russian energy and countries, such as Hungary, that could not easily break their dependence on Moscow or were unwilling to do so. That is why 800,000 barrels per day of Russian oil going to Europe via the pipeline has been excluded from the embargo for the time being.

The Europeans also decided to gradually limit the insurance of Russian oil shipments due to the importance of the shipping industry to Greece and Cyprus.

Some energy experts have warned that such concessions could undermine the effectiveness of the new European effort.

“Why wait six months?” asked David Goldwyn, a senior energy official in the Obama administration’s State Department. “With the sanctions now in place, all that’s going to happen is you see more Russian crude and more products flowing to other destinations,” he said. But he added, “It’s a necessary first step.”

Despite the oil embargo, Europe will likely remain dependent on Russian natural gas for some time, perhaps years. That could preserve some of Mr. Putin’s influence, especially if gas demand rises during the cold winter. European leaders have fewer alternatives to Russian gas because the world’s other major suppliers of this fuel – the United States, Australia and Qatar – cannot quickly expand exports significantly.

Russia also has other cards to play, which could undermine the effectiveness of the European ban.

China is a growing market for Russia. Mainly linked to pipelines that are approaching capacity, China has increased its shipments of Russian crude oil tankers 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 heavily discounted Russian crude.

Dr O’Sullivan said the relationship between Russia, Saudi Arabia and other members of the OPEC+ alliance could become more complex “as Moscow and Riyadh compete to build and maintain market share in China”.

Even as energy trade relations falter, major oil producers such as 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. Saudi oil export revenues are surging and may set a record this year, according to Middle East Petroleum and Economics publications, which tracks the industry, pushing the kingdom’s trade surplus to more than $250 billion.

India is another beneficiary because it has large refineries that can process Russian crude and turn it into diesel, and some of it may end up in Europe even if the raw materials come from Russia.

“India has become the de facto refining hub of Europe,” analysts at RBC Capital Markets said in a recent report.

But buying diesel from India will raise costs in Europe because it is more expensive to ship fuel from India than pipe it from Russian refineries. “The unintended consequence is that Europe is effectively importing inflation for its citizens,” RBC analysts said.

India gets about 600,000 bpd from Russia, up from 90,000 bpd last year, when Russia was a relatively small supplier. It is now India’s second largest supplier after Iraq.

But India may find it difficult to continue buying from Russia if EU restrictions on European companies securing Russian oil shipments raise costs too much.

“India is the winner, as long as they don’t suffer secondary penalties,” said Helima Croft, head of commodity strategy at RBC.