Russian oil embargo: what are the consequences for the European Union?
December 12, 2022
On Monday, December 5, the European Union imposed an embargo on Russian oil adopted in May. This entry into force is accompanied by the measure of limiting the price of oil at the level of 60 dollars per barrel. What will be the consequences of this embargo for the Russian and European economy, as the winter promises to be cold and gas imports from Russia are also reduced? What is the purpose of this cover? What are the alternative power supplies for the 27? Francis Perry’s Point of View, Research Director at IRIS, specialist in energy issues.
The embargo imposed by the European Union on Russian oil last May came into effect on December 5. What will be the consequences of this embargo for the Russian and European economies?
The European embargo on Russian oil has been planned for months, but actually took effect on December 5. Remember, this is the European Union (EU) embargo on crude oil imported by sea from Russia. So it’s not a full embargo (Hungary will continue to import Russian oil via pipeline), but the EU is depriving it of at least 90% or more of the Russian oil it imported before the war in Ukraine. This is a key decision.
Already in 2022, Russian oil exports have started to decrease, but the introduction of the European embargo will accelerate this trend. Russia is looking for other markets for its crude oil, and the EU is looking for other suppliers. Global oil flows continue to be redirected, with more Russian oil going to Asia and more European oil being imported from the US, the Middle East or Africa. I do not foresee an oil shortage as a result of this European embargo. Therefore, EU crude oil should not run out in the coming months.
Admittedly, energy prices, including oil prices, are high in 2022, but the entry into force of the embargo has not led to an increase in the price of black gold. At the close of markets in London on Friday, December 9, Brent oil from the North Sea was just under $77 a barrel, several dollars below its price just before the war in Ukraine. Therefore, markets are not panicking over this embargo, which is good news for Europeans and less good news for Russian leaders. Therefore, the negative effects of the embargo will be greater for Russia than for the EU, which is the target of the economic sanctions policy.
The last, especially important point. December 5, 2022 is not the end of the story, because two months later, on February 5, 2023, the European embargo on refined products from Russia will come into force. For Europeans, it will be a bit more complicated, especially for diesel, of which we are a major importer.
This embargo is accompanied by limiting the price of oil to 60 dollars/barrel. For what purpose?
This cap also came into effect on December 5, 2022, a very important date. Moreover, it is more complex than an embargo, and it is more difficult to assess the effectiveness of this particular sanction. There are actually three motives behind this decision, which was taken by the G7, the EU and Australia, i.e. 32 countries. The first reason is that since Western countries cannot prevent other countries, especially Asian countries, from importing Russian oil, limiting its price will still be a sanction, as each barrel exported by Moscow will bring in less money.
The second reason is that Western countries are not really trying to prevent any export of Russian oil to the world, because such a situation could lead to oil shortages and price increases (Russia is the third largest producer of crude oil after the United States. After Saudi Arabia and Saudi Arabia is the second crude oil exporter). A third reason is that Western countries, faced with the concerns of emerging and developing countries about the commodity price consequences of the war in Ukraine, offer a partial solution with a $60/barrel crude oil price ceiling. . The reasons for such a measure are therefore easily understood, but its implementation is and will be very complex. Moreover, this ceiling is not too restrictive for Russia.
Russian gas exports to Europe have also declined sharply, what are the 27’s alternative energy supplies?
Since early 2022, EU imports of Russian gas have indeed decreased significantly, as Europeans diversify their supplies and Russia gradually closes the gas tap to the EU.
Gas agreements have already been concluded between the EU and the USA, the EU, Egypt and Israel, and the EU and Azerbaijan. In the first two cases, additional gas supply to Europe will be in the form of liquefied natural gas (LNG) transported by ship, and to Azerbaijan by pipeline. New gas line Baltic pipeIt connects Norway, which became the EU’s leading gas supplier in 2022, with Denmark and Poland. There are also bilateral agreements between European countries and gas producing countries: Algeria/Italy, Abu Dhabi/Germany and Australia/Germany. Negotiations continue at the end of 2022, for example, between Algeria and France through their gas groups, Sonatrach and Engie. Therefore, the EU has seriously struggled to find gas outside of Russia in 2022, so that it will be completely deprived of gas in the coming years. However, in addition to this search for new supplies, the EU intends to reduce gas consumption and is trying to replace natural gas with other energies as much as possible. In addition, in the run-up to the winter of 2022-2023, Europe’s gas reserves are almost completely filled.
The current period and the next two years will not be easy for the EU in terms of gas. But it will be much more difficult for Russia to sell its natural gas without the European market than for the EU to do without Russian gas.