The EU and Russia: What Is Next After The Oil Ban?

By: Khaled A. BaRahma


Background:


As Moscow demonstrated its destructive power with missile strikes in the west of the country and deadly attacks in the east, the European Union took a major step on Wednesday toward weakening its president Vladimir Putin's financial access to the Ukraine war. The EU proposed an oil embargo to weaken its ability to finance the conflict.


Ursula von der Leyen, the head of the E.U. executive branch, outlined plans to eliminate crude oil imports by the end of 2022 and refined oil products by 2023. As part of the EU's biggest and most expensive commitment toward helping Ukraine and ending its reliance on Russian fossil fuels. This commitment is expected to be approved by the U.S. Congress this week. Moreover, to providing increasingly powerful arms to Kiev, the US and Britain have imposed economic and political sanctions on Russia.


In addition to pledging more military support on Wednesday, the EU furthered efforts to support Moldova, Ukraine's western neighbor that contains a breakaway region backed by Russia. The Russian war machine continued to pound targets across the breadth of Ukraine in the days before the Soviet victory is traditionally celebrated on Monday when President Putin would preside over a grand parade commemorating the victory over Nazi Germany. Donetsk residents lost 21 lives in attacks on Tuesday, officials said.


The Challenge:


By banning Russian fossil fuels, the valuable resources on which the EU depends so heavily, the EU has broken a "taboo" unthinkable a few months ago. After seeing pictures of indiscriminate killings in Bucha, near Kiev, the authorities reacted radically. The member states decided to phase out Russian coal imports within 120 days as a response to the horrors there. Russia's purchase of fossil fuels is its top source of revenue and accounts for more than 40% of the federal budget, thus complementing previous sanctions and helping cripple its war machine. Despite initial praise for Brussels' announcement, it was soon overshadowed by Moscow's inaction against its most profitable exports. As of last year, EU coal purchases totaled €5.16 billion, a figure well below that of the EU's spending on petroleum oils and gas, which totaled €71 billion and €16.3 billion respectively.


The Geopolitics of The Market:


Putting out about 10.1 million barrels of crude oil per day (BPD), the Russian Federation is the third-largest producer of crude oil after the United States and Saudi Arabia. Almost 2 million crude barrels are traded in Europe every day, along with almost 1 million BPD in other refined products. The Netherlands and Germany each consume over 1 million BPD.


Russia becomes the EU's largest oil supplier in 2021, as it exports over 25% of its oil imports. Approximately a million barrels of black gold are transported daily to refineries in Poland, Hungary, Slovakia, the Czech Republic, Austria, and Germany through the Druzhba pipeline, operated by Transneft, a state-controlled company in Russia. These refineries then turn the oil into diesel, naphtha, gasoline, and lubricants.


As a result of the pipeline's establishment in the 1960s, the two sides have become highly interdependent and rely on regular and continued supplies to conduct their business. Nevertheless, Druzhba, which means friendship in Russian, is not the only window through which providers can enter the EU. Tankers unload thousands of barrels of crude oil and tons of refined products through the bloc's ports, including Rotterdam and La Havre.


In the event the EU decides to restrict the supply of Russian oil, these ports will play a critical role in bypassing the physical pipelines and making sure supplies keep flowing after the embargo is implemented. In order to compensate for the huge loss of Russian oil, the WTO will have to rely on its strength as a wealthy single market in order to secure supplies from other oil producers, To compensate for the huge loss of Russian oil, the United Arab Emirates (UAE), Norway, Algeria, Nigeria, Saudi Arabia, and Saudi Arabia will have to step up their efforts.


The Limits of Diversification:


There were logistical and shipping challenges preventing all of Russia's oil from being shipped from Europe to Asia. If sanctions are imposed on Russia, it remains unclear how much Russian oil would be purchased by countries like India and China. Saudi Arabia, the oil cartel in charge of setting production levels in the organization, and its allies, such as Russia, have made it clear they won't increase their output to compensate for supply losses from Russia in case of a boycott.


Worldwide interest for oil was at that point high as economies bounced back from the COVID-19 pandemic, and vulnerabilities over the conflict exacerbated the tight market and excessive costs. U.S. President Joe Biden has requested lets out of the essential oil save to battle rising gas costs for Americans, while 30 different countries additionally have consented to send more oil to the worldwide market.


In the most serious situation of a deficiency of Russia's 3 million barrels to Europe and different nations denying its oil, a gigantic value spike to $180 per barrel could occur, trailed by a sharp fall due to declining request and monetary development.


A milder situation, where most Russian oil evaded by Europe is gobbled up at a rebate in other eager for energy nations, would see a deficiency of just 1 million barrels each day. Oil costs would dip under $100 by June and continue to tumble to $60 by the end of the year. That is relatively close from the present circumstance, for certain merchants and banks evading Russian oil even without sanctions.


The Boycott Cost for Russia:


The value for Russia's fundamental product benchmark to Europe, Urals unrefined, has been wrecked to a $35-per-barrel rebate contrasted with worldwide benchmark Brent. However, in light of commonly higher oil costs, Russia's income misfortunes have so far been restricted. Those unfamiliar money income are helping set up Russian funds amid approvals. However, aslong Russian barrels observe a market, then Russia is ready to go.



 

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