Russia’s Oil Ban in Europe Could Mean a New World Energy Order

HOUSTON — The European Union’s embargo on most Russian oil imports could provide another boost to the global economy, propelling a realignment of global energy trade that is economically weakening Russia, giving the China and India bargaining power and enriches producers like Saudi Arabia.

Europe, the United States and much of the rest of the world could suffer because oil prices, which have been climbing for months, could rise further as Europe buys energy from suppliers further afield. . European companies will have to travel the world to find the grades of oil that their refineries can process as easily as Russian oil. There could even be sporadic shortages of certain fuels like diesel, which is crucial for trucks and farm equipment.

In effect, Europe is trading an unpredictable oil supplier – Russia – for 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 leave no part of the world untouched, energy experts have said. But it’s hard to pinpoint the impact on every country or company, because executives, energy officials and traders will respond in different ways.

China and India may be shielded from some of the burden of rising oil prices because Russia offers them oil at a discount. Over the past two months, Russia has become India’s second-largest oil supplier, overtaking other major producers like Saudi Arabia and the United Arab Emirates. India has several large refineries that could make large profits by refining Russian oil into diesel and other fuels in high demand around the world.

Ultimately, Western leaders aim to weaken President Vladimir V. Putin’s ability to wreak havoc in Ukraine and elsewhere by denying him billions of dollars in energy sales. They hope their decisions will force Russian oil producers to shut down wells because the country doesn’t have many places to store oil while it looks for new buyers. But the effort is perilous and may fail. If oil prices rise significantly, Russia’s overall oil revenue might not drop much.

Other oil producers like Saudi Arabia and Western oil companies like Exxon Mobil, BP, Shell and Chevron should do well simply because oil prices are higher. The flip side is that consumers and businesses around the world will have to pay more for every gallon of fuel and freight shipped by truck and rail.

“It’s a big historical problem,” said Robert McNally, former energy adviser to President George W. Bush. “It will reshape not only commercial relations, but also political and geopolitical relations.”

EU officials have yet to release full details of their efforts to stifle Russian oil exports, but said the policies would come into effect over the months. This is supposed to give the Europeans time to prepare, but it will also give Russia and its partners time to find workarounds. Who will adapt best to the new reality is difficult to know.

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

Additionally, Germany and Poland have pledged to stop importing oil from Russia by pipeline, meaning the Europeans could cut Russian imports by 3.3 million barrels a day by the end of the year.

And the union said European companies would no longer be allowed to insure tankers carrying Russian oil anywhere. This ban will also be staggered over several months. Since many of the world’s largest insurers are based in Europe, the move could significantly increase the cost of transporting Russian energy, although insurers in China, India and Russia itself can now resume a part of this activity.

Prior to Ukraine’s invasion, roughly half of Russia’s oil exports went to Europe, amounting to $10 billion in transactions per month. Sales of Russian oil to EU members have declined somewhat in recent months, and those to the United States and Britain have been eliminated.

Some energy analysts have said the new European effort could help disentangle Europe from Russian energy and limit Mr Putin’s political influence over Western countries.

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

Another hope of Western leaders is that their measures will reduce 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 export less oil overall. As a result, Russian producers will have to close wells, which they cannot easily restart due to the difficulties of drilling and producing oil in inhospitable Arctic fields.

Yet the new European policy is the product of compromises between countries that can easily replace Russian energy and countries like Hungary that cannot or do not want to easily break their dependence on Moscow. This is why 800,000 barrels per day of Russian oil that arrives in Europe by pipeline have been excluded from the embargo for the time being.

The Europeans have also decided to phase in the restrictions on insuring Russian oil shipments due to the importance of the shipping industry to Greece and Cyprus.

Such compromises could undermine the effectiveness of the new European effort, some energy experts have warned.

“Why wait six months?” said David Goldwyn, a senior energy official with the Obama administration’s State Department. “As the sanctions are set up now, all that will happen is that you will see more Russian crude and products flowing to other destinations,” he said. But he added: “It’s a necessary first step.”

Despite the oil embargo, Europe is likely to remain dependent on Russian natural gas for some time, possibly years. That could preserve some of Mr. Putin’s influence, especially if gas demand increases during a 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 rapidly increase their exports substantially.

Russia also has other cards to play, which could call into question the effectiveness of the European embargo.

China is a growing market for Russia. Mainly linked by pipelines close to capacity, China has increased its shipments of Russian crude oil in recent months.

Saudi Arabia and Iran could lose from these increased Russian sales to China, and Middle Eastern sellers have been forced to cut prices to compete with heavily discounted Russian crude.

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

Even as energy trade relations are embroiled, major oil producers like Saudi Arabia and the United Arab Emirates have broadly benefited from the war in Europe. Many European companies are now keen to buy more oil from the Middle East. Saudi oil export revenues are rising and could set a record this year, according to Middle East Petroleum and Economic Publications, which tracks the industry, pushing the kingdom’s trade surplus to more than $250 billion.

India is another beneficiary as it has large refineries that can process Russian crude, turning 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 hub for Europe,” RBC Capital Markets analysts said in a recent report.

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

India receives about 600,000 barrels a day from Russia, down from 90,000 barrels a day last year, when it was a relatively minor supplier. Russia is now India’s second largest supplier after Iraq.

But India could struggle to keep buying from Russia if European Union restrictions on European companies shipping Russian oil raise costs too much.

“India is a winner,” said Helima Croft, RBC’s head of commodities strategy, “as long as it doesn’t get hit with secondary sanctions.”

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