Impact of Russian oil sanctions in Europe

The European Union has proposed a phased embargo of Russian oil, tightening its sanctions on Moscow for its invasion of Ukraine.

What does the European Union currently import?

• According to the International Energy Agency (IEA), European Union imported 2.2 million barrels per day (bpd) of crude oil and 1.2 million bpd of refined oil products before the war in Ukraine.
• Cars: Filling up cars will probably get more expensive.
  • Europe imports not only crude oil from Russia but also refined oil products, such as diesel to fuel industrial and passenger vehicles.
  • Importing diesel from a field other than Russia will mean increased freight costs and thus higher prices at filling stations.
  • In Germany, for example, 74% of diesel imports before the war came from Russia.
• Refineries depending on Russian oil: Russian oil makes up a fifth of oil refined in Europe, according to the IEA.
  • Some refineries producing fuel from gasoline to jet fuel as well as refineries in the Czech Republic, Hungary, Slovakia and Poland get fed Russian crude oil via the Druzhba – or ‘Friendship’ pipeline.
  • Supplies along Druzhba have been fluctuating sharply in recent years with deliveries running as high as 1.5 million bpd while declining in recent months including February to around 0.8 million bpd.
• Poland can switch to seaborne supplies from places like Saudi Arabia or Norway via the Gdansk port in the Baltic Sea.
• PCK Schwedt, which supplies cars and airports in Berlin and the region, and Leuna near Leipzig could get some oil from the German Baltic seaport of Rostock but not enough for them to run at full capacity.
• Poland is trying to replace all Russian crude in its refineries and could route some of the oil arriving in Gdansk to two German refineries, but the details have not been worked out yet.

Hurdles ahead

• Changing the existing supply routes will mean higher feedstock prices for two of Germany’s biggest refineries, feeding into higher prices for end consumers.
• For all the refineries in landlocked countries, making up for zero oil via Druzhba will be a mammoth task.
• It is likely to involve more expensive and less efficient transport via trucks, railways, rivers or the future extension of other pipelines such as TAL going from the Mediterranean via Austria to Germany.
• Such an extension still needs approval from southern German authorities.
• Slovakia, Bulgaria, and the Czech Republic are seeking exemptions from an imminent EU ban on Russian oil to sort such alternatives, while Hungary does not support the plans out of fear for its energy security.

Can they replace Russian oil with any other oil?

• Refineries are typically set up to run on a specific type of crude oil, such as Russia’s prime export-grade Urals.
• Other types of crude from Norway, the Middle East, the United States or West Africa can be blended or the refineries revamped, but this can change the yield of a refinery and cost more money in addition to higher freight costs.
• Traditional consumers of Russian oil will also now have to compete not only with each other for alternative oil imports but also with existing customers in Asia.

Reduced refining runs

• An oil refinery cannot simply be switched off as a restart is expensive and complex.
• Globally, refining capacity is shrinking as the world tries to reduce its dependence on oil-based fuels.
  • Morgan Stanley estimates that capacity has shrunk by as much as 2.7 million bpd since the onset of the coronavirus pandemic.
• With the re-emergence of economic growth as lockdowns come to an end, refineries will try to squeeze as much fuel as possible into the market.
• Refineries that have the toughest supply issues are likely to see lower margins because their crude costs will rise, so operators may slow processing.
• Countries and refiners typically also have storage tanks that they can tap in case of short-term disruptions.

Transition period

• EU countries have until the end of the year to prepare for the disruption and would likely fill storage in areas near refineries that might struggle.
• It would cause more severe disruptions if Russia cuts supplies first.

How will the ban affect crude oil prices?

• As long as Russian crude oil supplies continue, there would not be a major impact on crude oil prices which are already near 14-year highs.
• Oil is a very sensitive and finely balanced global commodity. Any supply-side disruption has a disproportionate impact on prices.
• Economic sanctions imposed by the US and Europe have already had some impact on exports of Russian crude oil.
  • Analysts have noted that cargoes of Russian crude oil are struggling to find buyers with many concerned about the reputational damage from buying Russian crude which is now being offered at steep discounts due to sanctions.

Impact on Indian consumers

• The sharp uptick in crude oil prices comes as Indian consumers have been enjoying a four-month reprieve from rising fuel prices with oil marketing companies (OMCs) having kept the price of petrol and diesel constant since early November.
• With elections in some States having come to a close, consumers are experiencing a consistent increase in fuel prices as OMCs look to bring prices in line with international benchmarks and recoup losses.
• The price of petrol and diesel has to be hiked by about 52 paise for every dollar increase in the price of crude oil for OMC marketing margins to remain constant.

Exam track

Prelims take away

• Crude oil
• Major and minor ports of India and the World

Mains track

Q. How will the decision of the EU to ban the import of Russian Oil will impact India and the world? Explain.