Keys | The European veto on Russian oil: an important step, but not definitive

An illustration of the community veto of Russian oil. DADO RUVIC (REUTERS)

After dragging its feet at first, aware that its dependence on Russia is infinitely greater than that of the United States or the United Kingdom, Brussels has finally taken the step this Wednesday: the EU will break ties with the oil from the Eurasian country.

It will do so progressively and with several exceptions to the norm (Hungary and Slovakia for sure, and perhaps also Bulgaria and the Czech Republic), but the step has been taken.

It will be important, because it will leave Russia without the main destination of its crude, although not definitive: Moscow will try to bypass it, searching by all means for alternative destinations for that production that is now left without an owner.

Even if you are forced to apply heavy discounts.

These are the main unknowns and uncertainties to resolve:

How much oil does Russia produce and export?

To who?

With a total pumping of 10.1 million barrels per day, Russia was in 2021 the third largest producer of crude oil on the planet, only behind the United States and Saudi Arabia.

Its importance is even greater in the case of foreign sales: the 4.7 million barrels it put on the market that year make it the second largest exporter in the world, only behind the Kingdom of the Desert.

Europe is, by far, the first destination of Russian oil: it absorbed almost half of the total, notably more than China (which took a third).

The geographical proximity and the existence of pipelines for its transportation are the two main reasons behind this enormous commercial relationship.

In the first two months since the beginning of the invasion, Russia has received 63,000 million euros from the countries of the Old Continent in exchange for its crude oil, gas and coal.

It is by far the largest supplier of fossil fuels in the Union.

Can Moscow sell all that oil to other countries?

You have alternatives, but it will not be easy for you.

First, because since the war began, all Russian products —and oil is no exception— have been surrounded by a halo of toxicity in much of the world, and the countries that agree to buy their production are exposed to severe Western sanctions.

Second, because most Asian refiners do not consume exactly the same kind of crude that Russia exports.

And third, because the longer distance to travel makes the product more expensive, and the potential buyers are not exactly close to the Eurasian giant.

Will you have to apply higher discounts?

Finding themselves between a rock and a hard place, Russia's major oil companies have been dragged into offering buyers deep discounts - now hovering around 30% - for months.

A kind of forced premium to compensate for all of the above.

Until now, India - a large importer - is the country that is taking advantage of them the most.

But there are already signs that some independent Chinese refiners are beginning to take the risk of sanctions in exchange for this discount.

However, the avalanche of Russian oil that will enter the market in the coming months – all that until now was sold to Europe – will be very difficult to absorb in the short term.

To give it an outlet, the Kremlin will have to apply a new snip on the sale price.

Where will Europe buy the crude it now imports from Russia?

The virtual disappearance of an actor of its size from the oil market will force other producing countries to increase the amount of crude they place on the market to try to fill the gap left by Moscow.

All eyes are on three OPEC countries — the United Arab Emirates, Saudi Arabia and Iraq — with the most spare capacity.

But the cartel continues without giving its arm to twist, and sticks to its plan of raising very little by little—too little by little—the maximum threshold of pumping of its members.

Nothing to turn on the tap, as the US, Japan, India and other large consumers have been claiming for months.

There is more: Latin America, the region of the world with the largest proven reserves, is called to take a step forward —Washington's recent rapprochement with Caracas is not innocent—.

Its participation would be especially important, because the oil it produces is essentially of a heavy type, just like the Russian one.

An early nuclear deal with Iran could inject another 1.4 million barrels in the short term.

And the US, since hydraulic fracturing offers much more flexibility in increasing production, can also do its bit, as it has already done with gas.

Being a progressive veto, both the EU and its future suppliers will have more time to react.

“Diversification is possible and relatively feasible quickly, sooner than we imagined just a month ago,” Italian Prime Minister Mario Draghi said in mid-April.

Why is it easier to stop importing gas than oil?

For two fundamental reasons: because the percentage of crude oil that reaches the EU from Russia (27%) is negligible compared to natural gas (41%) and because the world oil market is much better oiled and less stressed than that of gas.

There are more suppliers competing on a global scale – making it easier to secure contracts – and shipping by sea is more common.

Although the transfer of gas by ship has become popular in the last year, in which the competition between Europe and Asia to ensure supply has multiplied exponentially, the liquefaction processes (to put it in the ship's tank) and subsequent regasification (to be able to use it or transport it by tube once it arrives at port) they raise the price a lot.

What will happen to prices?

With demand practically unchanged —prices have begun to reduce consumption, but still very timidly—, the reduction in supply caused by the disappearance of the European market for oil from Russia adds a touch of spice to prices.

However, there is a precedent that invites optimism: when the US and the UK banned Russian crude, the feared price catastrophe came to nothing.

Although this Wednesday oil has risen strongly (+5%), it costs 20 dollars less than last March 8, when Washington and London broke all their oil ties with Moscow.