Europe wants to ban Russian oil, but cutting off supplies is an economic and political nightmare

Harry Robertson

Updated Sat, Apr 30, 2022, 2:00 AM 5 min read

The European Union is finally seriously considering banning Russian oil, but the costs could be heavy.
The bloc has become heavily reliant on Russian energy and is now indirectly funding the country's war machine.
But a Russian ban would likely push up oil prices even further and could increase competition and tensions with China.

Only when tanks rolled into Ukraine in late February did Europe fully wake up to its reliance on Russian energy.

Two months later, and the European Union is finally thinking seriously about cutting off oil supplies from Russia, as it looks for more ways to economically punish President Vladimir Putin's regime.

Germany on Thursday dropped its opposition to a Russian oil embargo. But implementing a ban on Russian oil imports is a political and economic nightmare for the EU.

The prospect has left the bloc scrambling to find alternative sources of energy, and to reach an agreement on what an embargo would look like.

Europe 'asleep at the wheel' on Russian energy

The figures are striking. In 2021, 25% of the EU's oil imports and 39% of its natural gas imports came from Russia, according to the bloc's official statistics organization. The EU last year imported more than $100 billion worth of Russian energy.

The current high energy prices mean Russia is still bringing in serious money from its energy exports. The country has exported more than $66 billion of energy since it invaded Ukraine, with the bulk going to the EU.

The problem is particularly acute for Germany, Europe's biggest economy. One-third of Germany's crude oil imports and more than half of its natural gas imports came from Russia last year, according to Reuters.

"They fell asleep at the wheel during [Angela] Merkel's chancellorship, just completely relying on Russian supplies," Ole Hansen, commodity strategist at Saxo Bank, told Insider.

European dependency on Russia energy — Europe has become highly dependent on Russian energy.Prepared by the Polish Economic Institute using Eurostat data.

Now, however, Germany is coming round to an oil ban. Officials have lifted their objections to an embargo, provided the process is gradual, the Wall Street Journal reported Thursday.

The EU is likely to unveil further sanctions on Russia in the coming weeks. Action on oil could be included, but analysts have said it's unlikely to take the shape of an immediate ban.

The politics are tricky. Hungary, whose leader Viktor Orban is closer than most with Putin, has previously expressed concern about tough sanctions. The EU — which is not known for moving quickly — has to weigh up the differing viewpoints of 27 governments.

A hunt for new sources

The race is on to find new sources of energy. The EU is aiming to be climate-neutral by 2050 and is stepping up its investments in green energy, but is now realizing it hasn't moved fast enough.

"You have this focus on trying to slow down or impede fossil fuel production, without a matching focus to try and shift to renewable alternatives," Richard Bronze, analyst at Energy Aspects, told Insider.

In the short term, the EU is scrambling to find alternative oil suppliers, with the US and Middle Eastern countries the most likely sources.

The OPEC+ group of oil-producing countries is slowly increasing output, and both the US and the International Energy Agency have announced they'll release oil from strategic reserves. This should make more supply available in the coming months.

But shunning Russian oil comes with heavy costs. By looking elsewhere for energy, Europe would be increasing its competition for supplies with China, potentially heightening tensions with the world's second-most powerful economy.

"Renewables is not going to happen overnight," Hansen said. "The problem right now is moving forwards, meaning you're putting money on other sources. That's when you could get into a global competition with Asia."

Higher prices will squeeze economies

An economic slowdown in China, driven by its zero-COVID policy, has reduced demand for oil and alleviated some pressure on global prices. But Beijing is keen to stimulate growth, and the country will keep guzzling oil, gas and coal over the coming years.

"As you look later in the year, it does become very challenging in crude markets," Bronze said. He expects Brent crude oil to rise to around $120 a barrel later in the year. Yet he said prices would be highly volatile, and could surge much higher than his baseline prediction.

Brent has already risen more than 40% this year, to around $109 Friday, increasing in turn the cost of gasoline and food.

Europe's economy is struggling as it is. Data on Friday showed that inflation in the eurozone hit a record high of 7.5% in the year to April, while economic growth came in at just 0.2% in the first quarter.

A further rise in energy prices is likely to worsen this combination of stagnating growth and high inflation, which economists call "stagflation."

Optimists say the crisis will spur a green revolution, but others argue that governments are realizing how important oil and gas still are.

In the short term, there's almost certainly more pain ahead. After years of relying on Russian energy, Europe faces no good options.

Read the original article on Business Insider

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