Just tear yourself apart. This is how the dilemma of the Western countries could be described. The embargo on Russian oil transported by tanker in Europe was the right thing to do in terms of value, but the price of oil is not going to go down and may even go up. If it does rise, then it will be a good thing for Russia because more money will flow into its budget. But at least Europe will not be financing the killing of Ukrainians, Eglė Samoškaitė writes in TV3.lt news portal.
On the other hand, rising oil prices are not bad in forcing humanity to use fewer fossil fuels because climate change has not gone anywhere since Russia started the war in Ukraine.
In order to weaken Russia, it would be necessary to beat the price of oil on the world market, which means increasing production in agreement with the oil-producing countries, which would be the rogue countries that imprison oppositionists, kill journalists and rig elections.
But this is in no way compatible with the desire to respond to climate change: to combat it effectively, we need to take our time to beat the oil price so that humanity can move more quickly to renewable energy. But then, in the short term, Russia will benefit enormously.
So these are very difficult times for the promoters of values in international relations. Whatever you do, some objectives will suffer.
“To sum up: the oil embargo will have an impact on Russia, but it will not be absolute. It is good that the European Union has made a valuable decision. Now the question is, will there be a redistribution of oil supplies? Yes, it will certainly be redistributed, and that redistribution and the abandonment of Russian capacity will reduce the amount of oil in the world, which means that the price of oil will rise. That is the other conclusion, which will already raise the price of petrol accordingly and will have an impact on the economy, inflation and so on. And can oil be found elsewhere in the world? It is possible, but one should not forget the fundamental values”, says Romas Švedas, an energy expert and lecturer at the Institute of International Relations and Political Science at Vilnius University.
“But we forget that we should be getting rid of oil anyway. We all say here that, oh, the oil will be expensive, but if petrol is cheap, it will be difficult for electric cars to break through. And when will we start to move away from oil? Then when it is painful for people and for the economy. In my estimation, a price of over EUR 2 per litre is already being felt. It is already painful. Having said all these concerns about oil, about oil supply, and about oil prices, there is one positive thing: it will boost the green economy. Because as long as the consumer is not in pain, he will not do anything,” he added.
R. R. Švedas argues that, hypothetically, one can imagine the price of petrol at EUR 5 per litre. He said that this would indeed be a price that would seem very high to many, but on the other hand, it would be good for the development of the green economy. “Let’s imagine a hypothetical petrol price of EUR 5. Oh, then… Then it will be. So it’s bad from one point of view, but it’s good for the green (economy),” he says.
How will the partial oil embargo work?
The European Union recently approved the sixth package of sanctions against Russia, which includes an embargo on oil transported by sea to Russia. Still, oil will continue to be delivered by pipeline. This exemption was requested by landlocked Hungary, which argued that it would be suicidal for its economy.
This means that oil will continue to flow through the “Družba” petroleum pipeline to Hungary, the Czech Republic and Slovakia. At the same time, Germany and Poland, which are also currently buying Russian crude via the Druzhba pipeline, have pledged not to buy any more as of the end of this year.
The effect of abandoning Russian oil transported by sea will be 75% of all Russian oil imports to the European Union. When Germany and Poland stop buying oil from Druzhba, the effect will increase to 90%.
It should be noted, however, that the phasing out of oil transported by sea tankers will only take place over a period of six months, which means that these sanctions will actually come into force at the beginning of 2023, and the phasing out of oil products will take place from the end of 2023.
European countries and China are the biggest buyers of Russian oil from Russia. According to the International Energy Agency, last year, the European countries belonging to the Organisation for Economic Cooperation and Development (OECD) imported around 2.3 million barrels per day, while China imported 1.4 million barrels.
The Organisation for Economic Co-operation and Development (OECD) includes 28 European countries. This is not the same as the European Union, but it gives an idea of the scale.
Russia exported an average of 4.7 million barrels per day of crude oil and condensate in 2021, but this does not include oil products.
According to the Centre for Research on Energy and Clean Air, the European Union has already paid EUR 32.2 billion for oil to Russia as of 24 February this year.
Once the embargo has taken normal effect, Russia will sell its oil to countries that are not sanctioned. “In fact, Russia is already doing this, redirecting flows from Europe to other regions. And this has been going on since the end of February,” says Tomas Janeliūnas, Professor at the Institute of International Relations and Political Science.
Although this redirection of flows is not easy or cheap, it is still profitable for Russia, given the high oil price on the world market. India and China are the biggest buyers of Russian oil in the Asian region, although the Chinese are trying hard not to depend on a single supplier.
A different solution will cause more problems for Russia
Professor Janeliunas argues that it is not so much the oil embargo itself that will cause Russia more problems but the coordinated decision by the European Union and the United Kingdom to prevent European companies from insuring tankers carrying Russian oil to any region of the world.
“That refusal to insure tankers may be more effective than the oil embargo itself. It means that a tanker carrying Russian oil cannot, in reality, even enter any port because, without insurance, you are illegal, in principle, as a ship. How they will manage to find other insurance companies, whether these insurers will be recognised, will be a big headache for Russian companies, which have been used to using ships of different national registrations,” the interlocutor noted.
In fact, such a move threatens to undermine Russia’s ability to transport oil even to other parts of the world since insurance for oil tankers is largely concentrated in the hands of European companies. This will also affect Russia if it tries to transport its oil by tankers from other countries. “It is the devil in the detail that makes the Russians most nervous”, says Mr Janeliunas.
€2 per litre of petrol will become the norm
Money is flowing to Russia not only because of high global consumption but also because the world’s demand for oil has risen as the global economy has recovered from the pandemic, and the price has been rising ever since Russia started the war in Ukraine with an initial drop and then a rise again.
In April this year, the average price per barrel was around USD 100, around USD 30 more than the average price in 2021. The price can still vary depending on the type of oil.
According to energy expert R. Shved, the embargo imposed by the European Union on Russian oil transported by sea is very positive in value terms, and the move was necessary, but it will not reduce the price of oil and may even increase it. Russia will have to find new buyers and the European Union new suppliers.
“Oil buyers and suppliers are in a state of flux. As the International Energy Agency predicts, there are no significant reserves to increase oil production, so the oil price is likely to rise. Economists say that EUR 2 per litre of petrol will become the norm. But this is what politicians are afraid of. Especially in America, Joe Biden is afraid that, God forbid, a gallon of petrol will become more expensive for an American,” says Mr Švedas.
To prevent price rises from hitting consumers so hard, countries are likely to start tapping into existing reserves. Increased crude oil production would reduce the price of oil, and hence the price of petroleum products, but not many countries in the world are able and willing to do so.
The top ten oil-producing countries are the USA, Russia, Saudi Arabia, Canada, China, Iraq, the United Arab Emirates, Brazil, Iran and Kuwait. The biggest players are the US, Russia and Saudi Arabia.
However, extraction does not equal export, as part of the production is consumed internally. Moreover, not all countries have the capacity to increase oil production, and in some cases, they are reluctant to do so. According to Professor T. Janeliūnas of the Institute of International Relations and Political Science at Vilnius University, OPEC, the Organisation of the Petroleum Exporting Countries, does not agree to increase production.
“OPEC countries do not, in principle, increase oil production. In a way, they also support the oil price and contribute to a favourable situation for Russia. Only the Americans have actually increased oil production. The other serious countries, which are among the largest oil suppliers, have not only not increased but are not even always maximising the already agreed quotas for how much oil they are supposed to sell per month or quarter. This decision also shows that Russia has quite a lot of influence on OPEC countries and can apparently agree one way or another on how OPEC countries support supply-demand in the world,” says T.Janeliūnas.
Countries that could increase oil production and drive up the price
R. Švedas mentions the USA, Canada, Saudi Arabia, Iran and Venezuela among the countries that could increase production and thus lower the oil price on the world market. “Not all of them can increase because some countries are at the limit. But some could increase,” he says.
“If we look at the countries that have the capacity to increase oil production, America is obviously one of them. America is now pushing into the global oil and gas market. But again, the fact that America is very active, both in terms of the Russian restriction and in terms of the Nord Stream-2 pipeline, is not to be taken lightly here. America had lost its position in the global natural gas market. This is a bit of a departure from the oil thing, but America is not just acting from an idea. The economy is following. It is increasing its natural gas and oil exports to the world and is reaping the rewards. It is just like the revenue from arms. America is not only standing firm in terms of values, but it is also winning economically,” the expert says.
In any case, the US is the leader of the Western world. But when it comes to value judgements in foreign and security policy, Saudi Arabia, Iran and Venezuela are a real headache for the West, and the question is whether it is moral to shake hands with their leaders and ask them to increase oil production and thus drive up world oil prices. Unfortunately, that is exactly what the West has to do.
In any case, the US is the leader of the Western world. However, if we are talking about value judgments in foreign and security policy, Saudi Arabia, Iran and Venezuela are a real headache for the West, and the question is whether it is moral to shake hands with their leaders and ask them to increase oil production and thus depress world oil prices. Unfortunately, that is exactly what the West has to do.
“We know that the Saudi Crown Prince ordered the murder of journalist Jamal Khashoggi in 2018. And then, a few months later, Boris Johnson went there in search of oil,” recalls Švedas.
Iran and Venezuela are not freebies for different reasons, so the West has a lot to turn a blind eye to for lower oil prices. For example, Bloomberg writes that the US may unilaterally relax sanctions on Iranian oil, despite the fact that there is no sign of reviving the 2015 agreement with the world’s major powers, under which Iran had committed to curbing its nuclear programme in return for sanctions relief.
Iran has increased its oil exports this year, mainly to China. If an agreement were reached with the West, Iran could put 0.5-1 million barrels of oil daily on the market. Moreover, the Islamic theocratic regime has around 100 million barrels of oil in storage, which means that it can be sold quickly.
The US is also in talks with the Venezuelan authorities, despite the fact that Washington and other Western countries do not recognise the legitimacy of President Nicolas Maduro and support the opposition leader, Juan Guaido. Venezuela’s oil reserves are enormous, but there has not yet been any particular breakthrough in the talks.
Too cheap oil is bad
But when we talk about sanctions and high oil prices, we completely forget climate change objectives, says energy expert R. Švedas. The cheaper the oil, the harder it is for countries to switch to renewables – there is not a strong enough nudge in the back because it does not hit consumers in the pocket.
“The paradox is that the world is now debating when that peak in oil production and consumption will be reached when oil production and consumption will start to fall and fall continuously. Not temporarily, but permanently and only downwards. And so far, we have not reached it. It is predicted that it might happen this year. There are hundreds of forecasts around the world of when that peak will be reached, but it is still not reached. And everybody here is now wondering whether the magic 100 million barrels per day will be reached,” says Mr Švedas.
According to Mr Švedas, when people say that USD 100 a barrel is very expensive, this is not entirely true because, in reality, it is “a bit expensive”. He says that, according to the International Energy Agency, a fair and economically reasonable price for oil should be around USD 80 per barrel. Still, in the past, we had seen periods when oil was between USD 60 and 70 per barrel.
“Oil that is too cheap is not good. It is not good because then it holds back green energy. And when we say USD 100 a barrel is expensive, my moral is that it is not very expensive. It was a bit expensive. We have been used to too much cheap oil. Objectively speaking”, adds the expert.
“If oil is cheap, why do I have to buy an electric car now? Why do I have to develop stations? Then the stops don’t get a commercial use, and if there’s no commerce, there’s no business, there’s no proliferation, and everything stands still. We are tragically behind in trying to replace fossil fuels, still using coal and oil. Gas even looks like a ‘good’ product in this case”, says R. Švedas.
With petrol prices at around EUR 2 per litre, it is painful enough for consumers to start thinking about changing their behaviour, but not yet enough to really commit to it. On the other hand, EUR 5 per litre would be really painful for consumers, but it would also give them a good incentive.
“So, here on the ERU 2, in my opinion, it’s just a first step. If we want a faster charge, the price should be higher, and it should hurt everybody, then we will start to move. Otherwise, people will not move”, he believes.