Oil embargo: turning off has consequences

After the coal import ban, the EU is considering imposing an import ban on oil from Russia as well. So far, the heads of government of the EU countries have not been able to agree on this. But the topic remains on the agenda. According to estimates by the Brussels think tank Bruegel, oil worth 450 million euros from Russia is currently consumed in the EU every day. This corresponds to the equivalent of around four million barrels a day. This makes Russia the most important oil supplier for the Union.

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The revenues account for about 30 percent of Russia’s state revenues and help finance the war against Ukraine – far more than gas or coal. “Compared to the income that the Russian state generates from oil supplies to the EU, the money from coal and gas is peanuts,” says Janis Kluge, a Russia expert at the Stiftung Wissenschaft und Politik. At least half of Russia’s oil export revenues come from Europe. With an embargo, Brussels would aim to weaken Putin’s war chest.

Deliveries from Russia have been falling in Europe since the beginning of the war. The financial sanctions and moral pressure from the public ensure that many traders and refiners no longer buy Russian oil. Many oil tankers from the gigantic empire are no longer allowed to dock at European ports. Despite this, Russia remains a very important oil exporter for Europe.

However, it is doubtful whether an embargo will really harm Russia or whether the Europeans will cut themselves in the flesh. Because some economies with extremely high energy consumption such as China, India or Pakistan are not participating in the sanctions against Putin’s empire. They come into question as potential buyers for the oil spurned by Europe.

India has already expressed interest. The subcontinent is poised for a deal with Russia. With that, India would probably get Russian oil at a bargain price. At 3.5 million barrels, it’s a small amount. However, since the subcontinent only gets about three percent of its black liquid from Russia so far, there is still a lot of room for improvement. Statements by Indian government officials indicate that there is interest in expanding the oil partnership despite criticism from the West.

Like the subcontinent, China is currently buying Russian oil at a discount of up to 30 US dollars per barrel. It can therefore be assumed that the supply relationships will shift in the medium term. However, Russia apparently has to accept financial losses in order to get rid of its oil.

Its advantage over gas is that it is not transported via pipelines but by tankers. Therefore, in theory, it is easier to redirect it. However, Simone Tagliapietra from the Bruegel think tank points out that “the Russian oil fields in the west of the country are not sufficiently connected to the markets in the east. The Russians have to find many tankers, which could be difficult,” he says.

It should also be difficult for Germany, as it is 34 percent dependent on Russian oil. East Germany in particular is likely to be affected. There are historical reasons for this. The Druschba (friendship) pipeline has been transporting the black liquid from the Urals to Schwedt in Brandenburg since 1963. East Germany is like an island that is not connected to the other oil pipelines. In addition to the refinery in Schwedt, the refinery in Leuna is also dependent on the pipeline. The two plants largely cover the petrol needs of Brandenburg, Saxony-Anhalt, Saxony and Thuringia. Most of the filling stations in these federal states get their fuel from these two refineries.

But not only gasoline and diesel, but also heating oil, bitumen, methanol and aviation fuels, for example for Berlin Airport BER, come from there. Alternatively, oil could also be delivered via the port of Rostock, but this replacement supply would be difficult because it only has half the capacity required.

Impending market turmoil

In addition, both refineries would have to be converted in order to be able to process other types of crude. It takes months and is expensive. “Without Russian oil, nothing works in large parts of East Germany,” said an industry insider to the “Handelsblatt”. A paper by the Federal Ministry of Economics also states that the embargo in East Germany could temporarily lead to market distortions. Private individuals and industry would probably be massively affected.

The loss of Russian oil is not likely to go unnoticed in western Germany either. Because the raw material is scarce. Hardly any larger quantities are currently available from the most important suppliers after Russia, Norway and Great Britain. Therefore, Germany would have to buy the missing raw material on the world market. “That would drive prices up, possibly to the recently seen 140 US dollars per barrel,” says Carsten Fritsch, raw materials expert at Commerzbank.

In his opinion, however, this state of affairs should not last long. He reckons that the OPEC+ oil organization will not be able to maintain its self-imposed production limit much longer, otherwise there is a risk that supply outside of OPEC+ will increase or that the West will turn its back on fossil fuels sooner. This also means that there will be a rapid expansion of renewable energies.

In addition, the federal government will release its oil reserves, which should last at least 90 days. She has already made part of it accessible in order to dampen the rise in oil prices. So there is a time buffer to explore new supply opportunities.

Not without restrictions

In addition to the expansion of renewable energies, savings measures such as speed limits, car-free Sundays and more effective heating must be introduced. “An embargo against Russia can only succeed through significant savings in consumption,” says Marcel Fratzscher, head of the German Institute for Economic Research. If that works, the impact on consumers and the economy in West Germany could be limited.

But Fratzscher has doubts. Such an embargo could fail because people are willing to pay the associated price – namely noticeable restrictions in everyday life. He refers to the division in society during the pandemic due to the implementation of corona measures. If that happens, oil prices are likely to rise and so will inflation. Then the consequences for the German economy would be considerable.

Investor info

German oil imports

The ban on oil deliveries from Russia would trigger high demand from EU countries for the raw material in other oil countries. However, since the supply on the world market is currently scarce, the oil price should then rise significantly in the short term. Investors can participate in this scenario with a BNP Paribas roll-optimized ETC on Brent Crude Oil.

The BO-Index Green Future, developed by the editors, contains stocks of companies that are benefiting from the shift away from Russian imports and the energy transition. Investors invest in a certificate that replicates the index one-to-one. The index contains 16 equally weighted stocks. The shares are restored to the original weighting semi-annually. Information at: https://boerse-online-invest.de/gruene-zukunft.

Notice of Conflicts of Interest:
The price of the financial instruments is derived from an index as an underlying. Brsenmedien AG, the sole shareholder of Finanzen Verlag GmbH, developed this index and holds the rights to it. With the issuer of the securities shown, Alphabeta Access Products Ltd. and Morgan Stanley & Co. International plc, Brsenmedien AG has concluded a cooperation agreement under which it grants the issuer a license to use the index. In this respect, Brsenmedien AG receives remuneration from Morgan Stanley & Co. International plc.

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