IZMIR
Cutting Russian oil imports to the EU over the next six months and oil products by the year end will be difficult considering the current market tightness and unavailability of alternative suppliers, experts told Anadolu Agency on Friday.
European Commission President Ursula von der Leyen confirmed the EC proposal on Wednesday of "a complete import ban on all Russian oil seaborne and pipeline, crude and refined" during the European Parliament's plenary session in France.
After adoption, the ban on Russian crude oil would enter into force six months later and prohibit refined oil products by the end of the year.
The proposal feasibility has been brought into question as some EU member states have varying dependency rates on Russian oil, notably Slovakia and Hungary, which are highly dependent. The sizable dependence of the EU on Russian crude and products, which, according to International Energy Agency, reached as much as 30% last year, has also made the proposal difficult.
"The EU imports about 26% of crude oil supplies from Russia and 17% of oil products. The most dependent on Russian oil is by far Slovakia, followed by Finland, Hungary, the Baltics and Bulgaria," according to Marco Giuli, an associate policy analyst at the European Policy Centre (EPC).
He affirmed that although oil is a relatively fungible commodity traded on very efficient and globally integrated markets, its fungibility is limited with its dependence on tanker fleets and availability or the ability of refineries to process only specific grades.
In general, a reconfiguration of flows brought about by a European ban on Russian oil would imply more imports from the Middle East, Giuli argued, but in the short run, Iraq, Iran, and Libya could mobilize capacity for Europe.
"Yet, this would require Iraq to breach OPEC+ quotas, for Iran to finalize the nuclear deal with the US, and for Libya an end to domestic geopolitical instability. This is a politically complicated and uncertain environment for additional supplies," he said.
Regardless, Giuli believes that cutting Russian oil fully by the year end could be done but at some cost. This would manifest in higher oil prices across Europe but would be concentrated in terms of industrial impact.
"Slovakia’s refining sector, for instance, is heavily dependent on supplies from Russia’s Druzhba (pipeline) system and has limited alternatives. This is the reason why some exception is contemplated for the most exposed nations. It will depend on the amount of oil that Russia will be able to divert to other markets," he said.
“It is likely that portions of Russian output will just have to disappear from the market, paving the way for significant effects. In this respect, it is worth mentioning that the Russian oil sector was already in trouble, as high costs and sanctions have prevented the development of new oil provinces and markets know already that the output was supposed to decline as of 2023," he said.
Effects of cutting Russian oil will not be confined to Europe
Samantha Gross, a director of Energy Security and Climate Initiative at Brookings Institution, is also of the opinion that unlike natural gas, oil is more fungible and can be transported to and from most anywhere.
However, she warned the market would be much tighter with higher prices if the EU refuses to buy Russian oil.
She said that Russia cannot just re-route all of the oil it used to send to Europe, as tankers would be hard to come by, and those that are able to move Russian oil are difficult to insure, while many would charge a premium for transport.
"Thus, some Russian oil would likely be shut in, actually reducing the total supply of oil to the market (rather than just re-distributing it)," Gross noted.
"OPEC producers with spare capacity (mostly Saudi Arabia and the UAE) could produce more, but they have been reluctant to do so up to now, instead following a gradual planned increasing path. Other producers will work to increase production, but it will take time," she warned.
Banning Russian oil supplies fully by the year end would certainly be difficult and would not just be confined to Europe but would have ripple effects around the world in higher oil prices globally, especially if some Russian oil is shut in, she said.
Cost and risk of trading in Russian oil will increase globally
Rystad Energy’s head of oil markets research, Bjornar Tonhaugen, explained that the crude oil volumes at risk from a complete EU embargo are around 3 million barrels per day (bpd) based on the latest imports in April.
"The EU imported 3.4 million bpd in January, but flows dropped by about 0.4 million bpd during April. The six-month phase-out period of crude is achievable for most countries, with a few exceptions, such as Hungary and Slovakia," he said.
On the other hand, the feasibility of Europe eliminating its entire 1.5 million bpd of oil product imports to zero by the end of 2022 should be viewed with skepticism, according to Tonhaugen.
He warned that the ongoing diesel and gasoline shortages through the reduction in crude throughput Europe and the potential ban on Russian products would lead to very tight road fuel markets into the summer.
He said that prices could spike further unless demand pre-emptively drops dramatically, such as through an economic recession or lockdowns similar to the height of the pandemic.
"The shipping and insurance sanctions included in the proposal, effectively banning European vessels and companies from providing services linked to the transportation of Russian crude and products, may lead to more extensive disruptions of international oil flows than the EU embargo itself," Tonhaugen said, adding that as much as 95% of the world’s tanker fleet is arranged through London-based insurance providers.
He concluded that the cost and risk of trading in Russian oil will increase globally, potentially leading to unintended disruptions.
"The EU aims to agree on the next round of sanctions by the end of the week or by 9 May. Increased market volatility is to be expected," he concluded.
