Russia: Oil refinery on fire in Nizhny Novgorod
Just weeks after the West bolstered its support to Ukraine on the battlefield by pledging tanks, the EU has escalated the economic fight against Vladimir Putin. Formerly co-dependent on the flow of oil and gas, the EU and Russia have been scrambling for substitutes over the past year. Although the separation is complete, the impact on petrol and diesel prices for Europeans remains to be seen.
On Sunday, February 5, the EU enacted a ban on all Russian refined petroleum products. This is but the latest turn of the screw as the bloc tries to cut off the principal revenue stream funding Russia’s war against Ukraine.
Parts of a raft of sanctions decided upon last June, an embargo on seaborne imports of Russian crude oil also came into effect in December.
The European Council claims these restrictions wipe out just under 90 percent of Russia’s oil exports to the EU – temporary exceptions being made for member states dependent on pipeline supplies from their Eastern neighbour.
According to the Centre for Research on Energy and Clean Air (CREA), 30 percent of the EU’s oil came from Russia in 2021, with the bloc buying over half of all exports. The EU remained Russia’s largest buyer until November.
The EU had reduced its Russian oil imports by half throughout 2022 ahead of the ban
Western sanctions and Russian retaliatory restrictions sent global oil prices soaring in the first months of the invasion.
The price of a barrel of oil on the Brent, West Texas Intermediate (WTI) and OPEC benchmarks all peaked at around $120 (£100) in June.
Prices at the pump shot up in turn. At UK forecourts, some paid over £2 a litre for petrol and diesel – an increase of almost 40 percent in just six months.
In the EU, fuel price inflation in the EU hit a record high of 45.2 percent in June, according to Eurostat. A litre of unleaded petrol reached as much as 219p per litre in Finland.
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In a bid to soften the blow on households battling the cost-of-living crisis, countries across Europe cut fuel duties. In March, the German government introduced a tax rebate worth €0.30 – France following suit in April.
In many countries, these measures are now ending just as a combination of factors risks sending prices sky-high once more.
In its first report of 2023, the International Energy Agency (IEA) warned the “well-supplied” global market could “quickly tighten” following the EU ban on Russian petroleum and a demand boom from a reopening China.
Nearly half of the forecast rise in oil consumption this year is set to come from China alone, according to the group.
In anticipation of these events, companies have been stockpiling for months, calming fears of any immediate shortages. The long-term impact on price, however, depends on whether global production is able to ramp up and how many other suppliers are able to step in.
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Europe’s energy market was completely transformed in 2022. Thanks to reducing its 40 percent dependency on Russian gas to below 15 percent, the bloc’s total share of energy imports from Russia fell from 25.5 percent to 15.1 percent between the first and third quarters of 2022, according to the World Economic Forum.
Russian diesel imports in particular were halved over the year, from 50 percent of all imports to 27 percent ahead of the ban. Russian fuel imports to the UK hit zero back in June.
Last summer, the EU overtook Asia as the number one buyer of US crude. According to the IEA, the EU has been trying to compensate by increasing shipments from West Africa, Brazil and Guyana.
Norway – which overtook Russia as Europe’s top gas supplier last year – also plans to scale up exploitation of Johan Sverdrup, Western Europe’s largest oil field, this year. Operator Equinor expects output to rise by 6.9 percent in 2023.
How much the ban will hurt Russia is also up for debate. Exports to the EU reportedly netted Russia around €70million (£62million) each day. This has now all but dried up.
Russian mineral extraction taxes and export duties typically make up $50 (£42) out of every barrel of oil shipped, according to CREA. In December, Western allies implemented a $60 (£50) cap on Russian crude, in a bid to squeeze the Kremlin’s profits.
Initial signs show this to have been successful, with the price of Urals crude oil – the Russian benchmark – falling well below that of other global suppliers.
However, Russia is making more money than ever from increased exports to China and India. Along with Turkey, the three countries combined now welcome 70 percent of all Russian crude flows by sea.
Both the EU and Russia, it seems, have been able to source reliable alternatives – prompting hopes that market jitters won’t cause petrol and diesel prices to skyrocket once more.