EU Mulls Ban on Russian Oil

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--The war raging in Eastern Europe means it's time to consider dramatic steps to sever an economic lifeline of Russia's--namely oil--the president of the European Union (EU) said.

Russia is in the top three in the world when it comes to crude oil and natural gas production, as well as exports. As such, the global economy is under strain because of the loss of Russian products due to the Western-backed sanctions that came in response to its decision to invade Ukraine in late February.

Some Western powers, such as Canada and the United States, have already shunned Russian products, but economies tied to Russia by a dense network of pipelines face a more difficult task.

EU President Ursula von der Leyen said the bloc was now putting a proposal forward to deal with that dependency.

"Let us be clear: it will not be easy," she said.

Europe gets about a quarter of its imported crude oil from Russia, which winds up putting hundreds of millions of dollars into the Kremlin's war chest each day. Norway, the U.K. and the U.S. can offer replacement barrels, but the global economy was already dealing with supply-side pressures before the start of the war, and addressing a Russian vacuum will require considerable heavy lifting.

U.S. Energy Secretary Jennifer Granholm called on domestic oil producers to help address the issue, saying the upstream sector should be on a war footing. U.S. crude oil producers have seemingly responded. Over the last four weeks, U.S. exports averaged 3.5 million barrels per day (BBL/d), a 25% increase from year-ago levels.

Click on the image at right for an EIA graph showing monthly U.S. crude oil exports through February 2022.

But not all of that oil is going to Europe. It's not even close. Most of the crude oil exported from the United States goes to Asian economies, not Europe.

That means Europe needs to be on a war footing of a different kind--one that is reminiscent of the rationing necessary to make it through World War II.

Von der Leyen said that diversification would be a gradual one that takes place over the course of six months. Refined petroleum products from Russia would be phased out by the end of the year.

"Thus, we maximize pressure on Russia, while at the same time minimizing collateral damage to us and our partners around the globe," she said.

That collateral damage will be hard to avoid. Most developed economies had experienced an uptick in inflation due to the post-vaccination recovery phase of the COVID-19 pandemic. Resurgent demand overwhelmed supplies and isolating Russia from the global economy in response to the invasion of Ukraine only adds insult to injury.

For Europe, those injuries will leave long-lasting scars. Political scientists Robert Keohane and Joseph Nye observed two unique characteristics of an interdependent relationship: parties can either be sensitive to the loss of a trading partner, meaning adjustments are possible without too much strain, or they can be vulnerable, meaning adjustments are difficult and painful.

The European economy is the vulnerable one in the relationship with Russia. With Russia in a cozy relationship with members of the Organization of the Petroleum Exporting Countries (OPEC), meanwhile, it's the United States that's sending out more oil.

But it will be tough for any single producer to address what the International Energy Agency estimates will be the loss of some 3 million barrels per day from the global economy due to Western-backed sanctions on Russia.

A collective response, however, may be another matter. Iran and Venezuela--two pariah states for Western powers--could add more barrels to the global economy should sanctions pressures ease.

Iran's oil minister met with Venezuelan President Nicolas Maduro this week to discuss joint collaboration in the energy sector. Iran in the past has supplied Venezuela with diluent to blend in with its heavier form of crude oil and, collectively, they could both help address the lingering Russian void.

That would nevertheless require some diplomatic maneuvering, particularly regarding Iran and its nuclear ambitions. But neither Iran nor Venezuela are powerful enough to upset the world order in the way that Russia has, so the global response to the war may rest on the lesser of two evils.

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