How to impose an embargo on oil and gas supplies from russia to Europe
But do not cause chaos in the energy market
In his evening addresses, President of Ukraine Volodymyr Zelensky is constantly talking about the need to strengthen sanctions against russia so that “the russian military machine would be left without means of subsistence”. The main emphasis is on blocking the supply of russian oil, because revenues from its export play a key role in financing russia's defense industry.
“In general, the democratic world must admit that money for russian energy resources is in fact money for the destruction of democracy. When these decisions are made, we will all be able to see that peace is approaching,” Zelensky has stated recently.
The expansion of anti-russian sanctions and embargo on energy supplies from russia are the main tasks of the Office of the President, which has engaged an international expert group to intensify economic pressure on russia.
The Ukrainian side expects that the EU will impose trade restrictions on russian oil in the foreseeable future.
Daniel Yergin, vice chairman of S&P Global, and Carlos Pascual, a senior vice president at S&P Global and a former U.S. ambassador to Mexico and Ukraine, have expressed their opinion on the consequences of such a step and how Western countries could prevent serious economic problems in case of an energy embargo on russia in the columns of “The Washington Post”.
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What seemed undoable when russia invaded Ukraine – banning russian oil and gas sales in a Europe that depends heavily on russian energy – is becoming increasingly likely. But it will need to be done right if it is going to work.
“Sanctions imposed against russia in February after the war began notably excluded energy because it was feared that Europe is so dependent on russia energy imports that severing the ties would result in skyrocketing prices, shortages and economic hardship. The European public’s support for the concerted Western response to the invasion might be undermined,” it was said in “The Washington Post”.
Almost two months of russia's war against Ukraine have passed. During this time, there were deadly shellings of civilians, horrors that were revealed to the whole world after the retreat of the russian military from the suburbs of Kiev, the emerged imminence of massive battles in the Donbas region.
The EU leadership, which has been promising to renounce russian energy for several years, is now ready to strengthen sanctions. The mood of politicians is changing amid growing disapproval of russian president vladimir putin's tactics.
The ban on the supply of russian coal has already been approved. But gas and oil still remain the major sources of funding for russia.
If Europe completely stops purchasing russian energy resources, it will cost the kremlin, according to the estimates of Daniel Yergin and Carlos Pascual, more than $250 billion a year (at current prices).
““Self-sanctioning” – refineries refusing to use russian oil, banks not providing financing – is already reducing European purchases of russian energy. High import tariffs on russian energy, intended to force russia to take massive discounts to make its oil competitive, are now under discussion.
Completely severing Europe from russian energy, though, will depend on skillfully managing the resulting energy shortages and turbulence,” it was stated.
To succeed requires something that has until now been largely missing: collaboration between government and industry
Political rhetoric, as well as empty phrases about “increased prices” that ignore the real deficit in the world market and hinder effective cooperation, should be set aside. The governments of the United States and the European Union need to interact with business on a daily basis, exchange information, coordinate complex logistics and supply chains in the oil market of almost 100 million barrels per day.
Now we all live in conditions of war time, which requires a special format of relations between government and industry. These can be “voluntary agreements”, such as during the 1950-1953 Korean War, or “emergency committees” that existed during the Suez Crisis of 1956 and allowed temporary waivers from some restrictions in order to optimize the exchange of critical information between government and business. With such an approach, sanctions against russian oil can be simply and effectively managed.
“According to our figures, about half of russia’s 7.5 million barrels per day of crude and product exports go to Europe – meeting about 35 percent of total demand.”
On March 31, US President Joe Biden announced a huge release from the US Strategic Petroleum Reserve – 1 million barrels per day for the next six months. This is an important step in compensating for the deficit.
Oil production in the United States will increase significantly this year. Producers from the Middle East could add even more oil to the market in a short time, but this will destroy the OPEC Plus agreement and will require overcoming differences in US-Saudi relations.
Returning to a nuclear deal with Iran and further lifting sanctions can also quickly fill the oil market. But russia, which is part of the deal, could hinder this step against its oil production.
The part of russian oil, rejected by Europe in case of an embargo, will go to Asia, but will be sold at great discounts. Sanctions will also provoke the hindrances in the transportation of cargoes, their insurance and bank financing. In addition, there will be difficulties with the physical availability of oil tankers. The experience of the 2012-2014 sanctions against Iran should be mentioned to assess the full range of consequences.
Natural gas is the biggest problem for Europe, which is too dependent on pipeline supplies from russia – about 35% of total demand. But now this figure can drop to 25%.
Liquefied natural gas (LNG) has already provided additional volumes to European consumers. But capacity to increase LNG production in the world is limited, and the existing LNG infrastructure in the EU is not enough to compensate for the deficit in case of a shutdown in russian supplies.
“Significantly expanding renewable energy will take years. But there are immediate steps that could reduce Europe’s gas dependency:
• temporarily using more coal;
• if possible technically, not shuttering Germany’s last three operating nuclear reactors;
• energy conservation;
• behavioral changes (e.g., adjusting building temperatures);
• and possibly some form of rationing,” Daniel Yergin and Carlos Pascual suggested.
Such steps may require difficult political decisions, especially in Germany. But as the horrors of war continue in Ukraine, Europeans may be more willing to support them than their leaders think.
To remit the economic consequences, Western governments could keep an eye on russia's financial assets in Europe to compensate for losses of consumers and companies.
Ten years ago, putin criticized the “shale revolution” having recognized it as a threat. And he was right to worry. Shale technology has allowed the United States to become the world's top oil producer after the country has been 60% dependent on its imports for many years. The United States has also become the largest exporter of LNG in the world market.
Without the “shale revolution”, Europe could be held hostage by putin. His behavior has now shown the world how strategically important American oil and gas are, not only for the United States but for Europe as the crisis deepens.
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