Europe Picks Up the Energy Weapon

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Proposed European Union embargo on Russian oil is a powerful sanction but won’t be painless, especially if Moscow retaliates

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The EU has been discussing a ban on Russian crude for weeks, but momentum picked up around the time Berlin found alternate suppliers. Potential holdouts Hungary and Slovakia have a 20-month exemption to likewise find alternatives. The ban could be approved as early as Wednesday, though a veto by Budapest remains a possibility.

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Oil prices rose just 3% in early trading, as the embargo was well telegraphed, the restrictions will be phased in and many buyers were already avoiding Russian crude. Russian oil exports were already likely to fall by 2 million to 3 million barrels a day (mbpd), oil executives and market analysts have estimated, relative to total preinvasion production of about 5 mpbd. The oil market remains tight and twitchy, but global demand has been tempered by the recent pandemic-related lockdowns in China. Pressure and prices would rise significantly if China reopens quickly. OPEC production increases could also ease the pressure, but those are very unlikely.

Global oil supply lines are already shifting. Western customers are finding new producers, and Moscow is selling more to India and refineries in China, albeit independent rather than state-owned ones. Different oil blends can make it difficult to switch suppliers without adapting refineries. This shift will likely continue, although there is a wild card: The EU ban clears the way for Washington to extend its Russian oil embargo, akin to sanctions on Iran.

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Russia’s reaction is hard to predict but will be important. The EU ban may not hurt Moscow financially in the near term—global price rises might offset lower sales—but it is a potent symbol and Mr. Putin is likely to react.

Russia could decide to suddenly cut supply to parts of Europe, causing an actual oil supply disruption, says Henning Gloystein of Eurasia Group. Alternatively, “Moscow might now retaliate by cutting its natural gas supplies to the EU,” says Simone Tagliapietra of Bruegel. Either move would spark shortages and bid up prices for global supplies of crude and liquefied natural gas, respectively.

One near certainty is higher European energy prices. These will further stoke inflation, and possibly force the European Central Bank to raise interest rates. The risk of a European recession continues to build.

Earlier sanctions largely carved out oil and gas flows, despite their potential to hurt Russia. Now the EU is resorting to the big guns, regardless of the risk that they backfire.

Write to Rochelle Toplensky at [email protected]

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Credit: www.Businesshala.com /

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