The economic sanctions against Russia continue, and so do the drastic changes that may be generated in the global economy. With the head of the European Commission, Ursula von der Leyen, reinstating the European Union’s urge to completely renounce Russian oil in the next six months —and before the end of the year, products derived from Russian crude oil— the global market is in the dark.
How would the global economy without Russian oil look like?
The European Commission’s announcement is full of complexities, not only because it would mean the most drastic economic sanction against Russia —it is estimated that 60% of Russian oil exports are for OECD countries in Europe— but also because several countries in the block are highly dependent on Russian oil to keep their industries running.
The new package of measures must be unanimously approved by the Member States in order to be executed, since questions such as where the crude oil will come from once the Russian supply ceases completely and what impact this will have on prices, must be taken into account.
According to an S&P Global report updated on May 10, “The conflict and its economic consequences have since displaced more than 2 million barrels per day from Russia. The EU’s oil sanctions are likely to reshape global energy flows as well as increase energy price pressures across the region.”
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Stats from the International Energy Agency (IEA) in January this year show that Russian oil production reached 11.3 million barrels per day (mb/d), only behind Saudi Arabia and the U.S. —the largest producers on the planet.
However, the Russian industry has managed to establish itself as the largest exporter of refined oil to global markets and the second —after Saudi Arabia— in crude oil international sales.
Now, according to information from the IEA, 60% of Russian oil exports go to OECD countries in Europe —20% go to China— which includes countries like Germany or France.
IEA figures show that of the total German oil purchases, 30% comes from the Russian industry —the share reaches 80% in countries like Finland, for example.
Russia provides around 40% of the gas Europe consumes and accounts for 16% of the world’s supply. In addition, it is the third-largest oil producer in the world; before the war broke out in Ukraine, it is estimated that Russian exports of crude oil and refined products covered around 7.5% of world oil demand.
For the U.S., Russian oil accounted for about 3% of all crude shipments that reached that country last year, according to data from the US Energy Information Administration. Before the war in Ukraine, U.S. imports of Russian crude in 2022 were falling at the slowest annual pace since 2017, according to the intelligence firm Kpler.
Replacing Russian oil is a tough, slow task, as not many nations can fill in and supply part of Russia’s quota, both on a global scale and from a market perspective.
First calculations by the International Energy Agency, OPEC, and private consulting companies point to countries such as Saudi Arabia, the United Arab Emirates, and Kuwait being capable of quickly answering the global demand for more oil amid the current crisis.
According to the most optimistic estimates, Iran and Venezuela could add over 1.5 million barrels per day, should geopolitical and logistical issues be overcome.
As for Iran, the nuclear agreement with Tehran would need reworking to lift restrictions on trade in Iranian crude. In the case of Venezuela, billions of dollars are needed, in addition to months to prep up the country’s oil infrastructure.
So, substituting Russian oil seems a gargantuan task in a period when prices could continue to rise. This would cause inflation to continue to rise in countries that have nothing to do with the war in Ukraine.