Russian Oil Price Peaking: Five Things You Need to Know | Russo-Ukrainian War

A price cap set by the Group of Seven (G7) as well as an outright ban by the European Union on Russian maritime oil went into effect on Monday as the two blocs attempt to curb the Kremlin’s ability to continue to finance the war in Ukraine.

On Friday, the G7, EU and Australia agreed to set a limit on the price of Russian oil at $60 a barrel. In May, the EU announced a ban on crude oil transported by sea from Russia. The 27-member bloc also said a ban on imports of refined petroleum products will be enforced from February 5.

The ban covers more than two-thirds of Russian oil imports entering the EU, according to European Council President Charles Michel. He called the ban a symbol of EU unity and said in a tweet that he exert “maximum pressure on Russia to end the war”.

While the EU oil embargo also applies to EU operators who insure and finance ships carrying Russian crude oil around the world, it does not apply to imports of Russian oil entering the bloc. through pipelines.

The Druzhba pipeline, which started operating in 1964, supplied Russian oil to many countries in Central and Eastern Europe, including Germany, Poland, Hungary, Slovakia, the Czech Republic and Austria .

Germany, Poland and Austria backed the ban, pledging to completely wean Russian oil imports by the end of this year.

But Hungary, the Czech Republic, Slovakia and Bulgaria are still heavily dependent on the Russian pipeline and will be allowed to temporarily continue imports until they develop alternative supplies. However, these pipeline imports cannot be resold to other EU countries or non-EU countries, according to the European Commission.

Here are five things to know about the effects of the EU oil import ban and price cap:

What does the ban and the price cap mean for the oil market in the EU?

Prior to Russia’s war in Ukraine, the 27-member bloc was heavily dependent on Russian oil exports. In 2021, the EU imported $74.8 billion worth of crude oil and refined petroleum products from Russia.

These imports of Russian crude oil amounted to 2.2 million barrels per day, including 700,000 barrels per day via pipelines as well as 1.2 million refined petroleum products, according to the International Energy Agency (IEA). ).

With EU embargoes on Russian crude oil transported by sea and on refined petroleum products in February coming into force on Monday, the IEA also said the bloc will need to replace 1 million barrels of crude and 1, 1 million barrels of petroleum products per day.

About 10% of oil imports from the Druzhba pipeline will continue temporarily.

Mats Cuvelier, a Brussels-based lawyer specializing in European and international trade, told Al Jazeera that the European ban on Russian oil will not have a significant effect on demand and supply within the bloc in the short term. term.

“This regulation has already been in force for six months, which gives EU countries enough time to find alternative oil supply routes,” he said. “The bloc has focused on replacing Russian oil supply routes with routes from countries in the Middle East and elsewhere, so that the EU does not face a shortage of crude oil. “

Philipp Lausberg, an energy policy analyst at the European Policy Centre, shared a similar view and pointed out that the main effect of the oil embargo could be a rise in oil prices.

“Brent oil will be more expensive, and that’s something the EU will have to prepare for,” he told Al Jazeera.

On the day the price cap went into effect, world oil prices rose by 2%.

But Lausberg said a global economic slowdown would reduce global demand for oil in the coming months, which would lower the price of oil again.

What does this mean for tankers dependent on EU finance and insurance?

The EU price cap and ban on oil imports also prevent European operators “from ensuring and financing the transport, in particular by sea, of Russian oil to third countries”.

According to Lausberg, it will be particularly difficult for Russia to continue exporting its crude oil and petroleum products to the rest of the world.

“Many ships from India, China and other countries are insured by companies in Europe and the UK,” he said. “These vessels are now subject to EU, G7 and Australian rules on crude oil transported by Russian sea. Russia, however, has said its legislation does not recognize these rules, so it remains to be seen how the Kremlin plans to continue exporting oil to these countries under these new rules.

FILE PHOTO: Gas pipeline model and German flag, July 18, 2022. REUTERS/Dado Ruvic/Illustration/File Photo
[Dado Ruvic/Reuters]

What does this mean for Russia?

According to the IEA, Russian oil production is expected to fall by 1.4 million barrels a day next year after the EU ban on maritime exports of Russian crude came into force.

Cuvelier said Russian ships could try to evade those sanctions by registering in the Marshall Islands or Liberia and removing their Russian flags.

“But this tactic is on the EU’s radar, and the bloc has been beefing up its maritime security to ensure Russian ships don’t escape sanctions in this way,” he said.

Meanwhile, Kremlin spokesman Dmitry Peskov said Russia would not agree to the recently announced price cap, adding that it needed to analyze the situation before deciding on a specific response.

Russia’s permanent representative to international organizations in Vienna, Mikhail Ulyanov, also tweeted: “From this year Europe will live without Russian oil.”

“Moscow has already made it clear that it will not supply oil to countries that support anti-market price caps,” he said. “Wait, very soon the EU will accuse Russia of using oil as a weapon.”

Russia has options on how it might retaliate. “Russia has warned that it may completely ban oil by pipeline to the EU, which could be difficult for countries in the bloc dependent on this supply route,” Lausberg said.

“While oil supply through sea canals can be easily replaced, landlocked countries will struggle to find an alternative if Russia blocks oil by pipeline,” he said.

Will countries that are not part of the rules be affected?

Countries like India, China and Turkey are also dependent on Russian oil and continue to import oil from Moscow.

Vivek Mishra, a fellow at the Observer Research Foundation in New Delhi, told Al Jazeera that Russia will most likely negotiate with big buyers like India and China and arrange currency swaps.

“While these mechanisms cannot replace Russian income from Europe, it will certainly create a soft landing for Russia,” he said. “I don’t think India loses much as a big buyer of Russian oil. If we base ourselves on the statements of Russia and India, it indicates the tendency of India to buy oil from Russia.

“If anything, India could probably negotiate more discounts as prices will be capped globally and Russia will be able to lose a lot more due to lack of related factors such as insurance companies not wanting to bet on Russian tankers,” he added. .

How will the embargo and price cap affect the international oil market?

OPEC+, a group made up of the Organization of the Petroleum Exporting Countries and its allies, held a meeting on Sunday to discuss how to ensure the oil market is not distorted by the new rules.

He agreed to continue cutting oil production by 2 million barrels a day, or about 2% of global demand, until the end of 2023.

Lausberg explained that all oil producers except Russia are supposed to benefit from these rules.

“These sanctions are primarily aimed at punishing Russia for its actions in Ukraine,” he said.

“But whether Russia manages to export more oil by buying more tankers or using any other tactic, the reaction of the rest of the world and the oil market remains to be seen.” he said.

Leave a Comment