Europe's Russian oil ban could mean a new world order for energy

In the past couple of months, Russia has become the second biggest oil supplier to India, leapfrogging other big producers like Saudi Arabia and the United Arab Emirates

By Clifford Krauss

Published: Jun 3, 2022

A gas station in Goshen, N.Y., May 26, 2022. The European Union’s embargo on most Russian oil imports could deliver a fresh jolt to the world economy, propelling a realignment of global energy trading that leaves Russia economically weaker, gives China and India bargaining power and enriches producers like Saudi Arabia. (An Rong Xu/The New York Times)

HOUSTON — The European Union’s embargo on most Russian oil imports could deliver a fresh jolt to the world economy, propelling a realignment of global energy trading that leaves Russia economically weaker, gives China and India bargaining power and enriches producers like Saudi Arabia.

Europe, the United States and much of the rest of the world could suffer because oil prices, which have been marching higher for months, could climb further as Europe buys energy from more distant suppliers. European companies will have to scour the world for the grades of oil that their refineries can process as easily as Russian oil. There could even be sporadic shortages of certain fuels like diesel, which is crucial for trucks and agricultural equipment.

In effect, Europe is trading one unpredictable oil supplier — Russia — for unstable exporters in the Middle East.

Europe’s hunt for new oil supplies — and Russia’s quest to find new buyers of its oil — will leave no part of the world untouched, energy experts said. But figuring out the impact on each country or business is difficult because leaders, energy executives and traders will respond in varying ways.

China and India could be protected from some of the burden of higher oil prices because Russia is offering them discounted oil. In the past couple of months, Russia has become the second biggest oil supplier to India, leapfrogging other big producers like Saudi Arabia and the United Arab Emirates. India has several large refineries that could earn rich profits by refining Russian oil into diesel and other fuels in high demand around the world.

Ultimately, Western leaders are aiming to weaken Russian President Vladimir Putin’s ability to wreak havoc in Ukraine and elsewhere by denying him billions of dollars in energy sales. They hope that their moves will force Russian oil producers to shut down wells because the country does not have many places to store oil while it lines up new buyers. But the effort is perilous and could fail. If oil prices rise substantially, Russia’s overall oil revenue may not fall much.

Other oil producers like Saudi Arabia and Western oil companies like Exxon Mobil, BP, Shell and Chevron stand to do well simply because oil prices are higher. The flip side is that global consumers and businesses will have to pay more for every gallon of fuel and goods shipped in trucks and trains.

“It’s a historic, big deal,” said Robert McNally, a former energy adviser to President George W. Bush. “This will reshape not only commercial relationships but political and geopolitical ones as well.”

EU officials have yet to release all the details of their effort to squelch Russian oil exports but have said those policies will go into effect over months. That is meant to give Europeans time to prepare, but it will also give Russia and its partners time to devise workarounds. Who will adapt better to the new reality is hard to know.

According to what European officials have said, the union will ban Russian tanker imports of crude oil and refined fuels like diesel, representing two-thirds of the continent’s purchases from Russia. The ban will be phased in over six months for crude and eight months for diesel and other refined fuels.

In addition, Germany and Poland have pledged to stop importing oil from Russia by pipeline, which means Europeans could reduce Russian imports by 3.3 million barrels a day by the end of the year.

And the union has said European companies will no longer be allowed to insure tankers carrying Russian oil anywhere. That ban will also be phased in over several months. Because many of the world’s largest insurers are based in Europe, that move could significantly raise the cost of shipping Russian energy, although insurers in China, India and Russia itself might now pick up some of that business.

Before the invasion of Ukraine, roughly half of Russia’s oil exports went to Europe, representing $10 billion in transactions a month. Sales of Russian oil to EU members have declined somewhat in the past few months, and those to the U.S. and Britain have been eliminated.

Some energy analysts said the new European effort could help untangle Europe from Russian energy and limit Putin’s political leverage over Western countries.

“There are many geopolitical repercussions,” said Meghan O’Sullivan, director of the geopolitics of energy project at Harvard University’s Kennedy School. “The ban will draw the United States more deeply into the global energy economy and it will strengthen energy ties between Russia and China.”

Another hope of Western leaders is that their moves will reduce Russia’s position in the global energy industry. The idea is that despite its efforts to find new buyers in China, India and elsewhere, Russia will export less oil overall. As a result, Russian producers will need to shut wells, which they will not be able to easily restart because of the difficulties of drilling and producing oil in inhospitable Arctic fields.

Still, the new European policy was the product of compromises between countries that can easily replace Russian energy and countries like Hungary that can’t easily break their dependence on Moscow or are unwilling to do so. That is why 800,000 barrels a day of Russian oil that goes to Europe by pipeline was excluded from the embargo for now.

The Europeans also decided to phase in the restrictions on insuring Russian oil shipments because of the importance of the shipping industry to Greece and Cyprus.

Despite the oil embargo, Europe will likely remain reliant on Russian natural gas for some time, possibly years. That could preserve some of Putin’s leverage, especially if gas demand spikes during a cold winter. European leaders have fewer alternatives to Russian gas because the world’s other major suppliers of that fuel — the U.S., Australia and Qatar — can’t quickly expand exports substantially.