The Exorbitant Cost of the End of Russian Oil for Europe.

Something absolutely necessary, however, to undermine Vladimir Putin's strategy.

Highly dependent on Russian gas, the European Union sends 200 million dollars every day to Vladimir Putin's Russia to pay for its gas imports. Before even thinking of putting an end to this dependence on Russian gas, Europe is asking itself another question: can it already do without Russian oil?

Yes, but by paying the price, with fuels that are probably even more expensive than today. This, in short, is the equation that is in the hands of the EU-27, as the European Commission considers reducing to zero imports of crude and refined products from Russia by the end of 2022. The decision is still uncertain, due to the opposition of some Central European countries that are highly dependent on Russia for their supplies.

The EU-27 import about 2.5 million barrels per day of oil from Russia, according to Citi analysts, as well as 1.4 million barrels of refined or semi-refined products, including diesel or gas oil, the most consumed fuel on the Old Continent.

Europe produces the vast majority of its diesel, but Russia accounts for more than half of its imports. The European Union has already started to diversify its supply, even before the embargo came into effect. Many European buyers are choosing not to buy Russian oil products.

Some are afraid of contravening European or American sanctions indirectly, especially on the financing of transactions. For others, like the French TotalEnergies or the Anglo-Dutch Shell, it is also a position of principle to respond to the pressure of Western public opinion.

“But in the end, despite these initiatives, European imports of Russian oil products have remained higher than expected at the beginning of the war,” says Ajay Parmar, an analyst at ICIS. “The bulk of the effort remains to be done. The fact that the sanctions do not take effect until the end of the year gives the refining sector some time to prepare”.

To compensate for the banned Russian barrels, the Europeans will increase their imports from the United States, Africa, the Middle East, and India, for both crude and fuels, as Ajay Parmar explains:

“Exports of refined products from India to Europe have increased by 50% since January.”

Patrick Pouyanné, CEO of TotalEnergies, plans to import fuels from Saudi Arabia to replace Russian volumes. The Europeans will also try to increase their refining capacity, but this effort will be limited because the refineries are already running at full capacity. The world of oil will therefore undergo a giant game of communicating vessels over the next few months if the embargo comes into force. The Russian barrels that the Europeans will no longer buy will go to Asia, where they will be sold at a sharp discount, while the 27 will import more from other regions of the world.

The cohesion of the West in the face of Putin promises to be put to the test again

This will not be so simple, especially for landlocked countries such as Hungary, the Czech Republic, or Slovakia, which are today largely supplied with Russian oil by pipeline.

Above all, this redistribution of world trade will have a cost. The distances covered by tankers will potentially be longer, and some refineries will have to adapt their industrial facilities to different types of oil. This will be less efficient and therefore more expensive.

“The prospect of a European embargo comes at the worst possible time, as the world market is already extremely tight,” adds Ajay Parmar. “Supply is limited and demand is picking up for all means of transport after the health crisis”. “Constraints on global refining capacity are exacerbating the turmoil caused by the war in Ukraine," notes the International Energy Agency in its latest oil report.

Global stocks of fuel oil, diesel, and naphtha (for petrochemicals) have been falling continuously for the past year and a half, and are at record lows, the agency notes. With a consequence that is probably inevitable: even more expensive fuels for Europeans.

This is also what Vladimir Putin is betting on to hope to win the war in Ukraine: that the consequences become unbearable for the populations of the European countries so that support for Ukraine becomes so unpopular that governments have to stop it.

It is up to us Europeans to remain united and show solidarity so that the solidarity shown so far has not been in vain, and that Ukraine can stand firm in this odious war led by Vladimir Putin's Russia.