Oil embargo against Russia: What are the consequences of the EU compromise?

Created: 06/02/2022, 10:35 am

By: Lisa Fischer

The EU countries have agreed on a compromise with regard to the oil embargo against Russia.

The decision has these consequences.

Brussels – The EU Commission originally proposed ending imports of crude oil from Russia within six months.

After weeks of arguments about a planned oil embargo against Russia, the EU countries have now agreed on a compromise at the summit in Brussels.

However, there are exceptions.

EU agrees on oil embargo compromise: no more deliveries by sea

What happened?

At an EU summit in Brussels, the states agreed on a partial embargo.

Russian oil deliveries by sea are to be stopped.

But: Deliveries via the pipelines will still be possible.

The states agreed to this exceptional solution under pressure from Hungary.

Details of the agreement were worked out by the permanent representatives of the EU on Wednesday.

The sanctions package could then be formally approved.

What percentage of crude oil is imported from Russia to the EU by sea?

“Two thirds by sea and one third by the Druzhba pipeline.

For the latter, there is an exception to the embargo with regard to Hungary, Slovakia and the Czech Republic," says Carsten Fritsch, commodity analyst at Commerzbank AG.

Will the partial embargo hurt Russia?

"The partial embargo is actually a full embargo," says Fritsch.

"Because by the end of the year, the EU wants to replace 90 percent of Russian oil imports." However, in recent months Russia has managed not to record any significant decline in oil exports, according to Fritsch.

One reason could be that Russia has increased exports to China and India.

According to Fritsch, however, there will be a certain decline sooner or later.

"But even if Russia can only sell 60 percent of its crude oil, for example, it is traded at higher prices on the world market than a year ago."

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What does that mean for Germany?

For Germany, the situation after the EU compromise is as follows: According to Economics Minister Robert Habeck (Greens), the share of Russian oil in German consumption has fallen from 35 percent before the Ukraine war to 12 percent currently.

Tanker oil - about a third of the amount before the war - had been replaced, Habeck said in early May.

So the EU decision doesn't change anything.

Before the war, however, two thirds of German oil imports from Russia came via the Druzhba pipeline to the large East German refineries in Leuna and Schwedt.

To what extent does the oil embargo now being discussed affect the pipeline in East Germany?

In theory, Leuna and Schwedt could continue to be supplied via the "Druschba" after the EU decision, since the pipeline is exempt from the embargo for the time being.

But Germany and Poland made a so-called protocol declaration at the EU summit: they confirmed in writing that they would stop buying Russian oil by the end of the year.

In practice, the "pipeline exception" only applies to Hungary, Slovakia and the Czech Republic.

The Druzhba pipeline for Russian oil ends in Schwedt, from where large parts of eastern Germany in particular are supplied with oil products.

The refinery belongs to the Russian group Rosneft and is the most important supplier of petroleum products in the Berlin-Brandenburg area.

According to the IGBCE union, around 1,200 people work in the PCK refinery, plus several hundred jobs at suppliers.

EU agrees on oil embargo: is there a threat of a bottleneck at German gas stations?

How does the partial embargo affect prices?

Experts don't dare to give an estimate at the moment.

Commodity analyst Fritsch observed on Tuesday: “The Brent price on the stock exchange is currently rising significantly and is the highest value since the beginning of March.

The diesel price on the raw materials exchange is also already rising noticeably.”

What does the compromise mean for the crude oil world market?

According to Carsten Fritsch, trade will shift.

"India will probably import more oil from Russia and the EU will import more from West Africa, North Africa and the United Arab Emirates." In addition, the USA has significantly expanded its crude oil exports in recent months.

"It's currently around four million barrels a day," says Fritsch.

One can assume that a certain part of this will also go to Europe.

Is there a bottleneck at the petrol stations?

The head of the International Energy Agency (IEA), Fatih Birol, fears a fuel shortage in Europe.

"The oil markets could get tight next summer," he told Der Spiegel.

Analyst Fritsch says: “It will probably be difficult to easily replace the three million barrels a day that will be lost from Russia elsewhere.

There can be certain bottlenecks for a short time.” It may take some time for the EU to find alternative suppliers.

In addition, refineries would have to be converted to processing other types of oil.

However, the EU still has strategic oil reserves.

It would make sense to then release them, says Fritsch.