Can the EU embargo Russian oil now? I explain yes, it can, and how. Also what OPEC will do. My Live Al Jazeera interview on 12.03.22 (ca. 00:20 CET, 18:20 EST). Here are the main points coved, quickly, from memory.
Afer an initial price spike from an EU embargo, the IEA’s SPR – strategic pertroleum reserves – can make up any shortall of oil for some weeks or so or months while OPEC and the USA increase production.
Especially the UAE and most especially Saudi Arabia have significant excess capacity, at least 2 million barrel/day (mbd) they can add to the market. Oil is fungable, there is one global market, so in principle the shock of an embargo could be ended rather quickly.
Regarding Germany: it is the main EU Member state now opposed to an immediate Russian oil embargo. However, I am confident it is being overly cautious and that Germany can do this now without significant disruptions.
In particular, Germany worries about the fact that several refineries in Germany and Central Europe are located inland, and supplied by the Druzhba Pipeline bringing about 700,000 barrels per day of Urals grade oil (i.e., hevier, sulferous oil) as their feedstock. So, the German government is claiming it would be very difficult to supply these refineries. However, this is not such a problem.
Consider that two German refineries, in the South of Germany, Bavaria for example; these two refineries are on a second pipeline, the Transalpine pipeline. This comes from the port of Trieste Italy. So these two refineries are fine. In an embargo of Russian Druzhba Pipeline oil they can be supplied from Trieste.
However, the refinery the German leaders most worry about is called Svedt, and it is located in Germany near the Polish border, also on the Druzhba pipeline [i.e., PCK Oil Refinery, at Schwedt, Oder River, Brandenburg State, Germany]. However, I can make some immediate points about this refinery.
- Of course, the management complains it supposedly is very difficult to operate without Druzhba supplies as it is owned by the Russian oil company Rosneft.
- In 2019, the Druzhba was actually shut off by the Russians due to contamination of its oil inside Russia. It was offline for a couple months and there was no big crisis in Europe.
- However, after that experience of a Russian cutoff, the (several) refineries on the entire pipeline in Europe made a deal that they would collectively keep at least 150 million barrels (presumably of Urals oil) on hand, in storage at the refineries in case of another cutoff. So, Citibank estimates that there are about 120 million of these barrels now available at these refineries. At, say, 700,000 bbl/day typical total supply from the Druzhba, that alone is about 170 days of oil.
- However, in the case of the one refinery, at Schwedt, Germany near the Polish border that supplies much of eastern Germany including Berlin, the German state of Brandenberg, and the big Berlin airport, etc. – this is the one the German government worries about the most. However, this one can certainly be significantly supplied by rail and, further, it is on the Oder River, which is navigable (although rather shallow – this has to be considered) and the Oder connects to the north into the Baltic Sea at the Polish deep water port of Szczecin. So, either from the Port of Szczecin by rail or by river barge, this refinery can be supplied, in my estimation.
As to the effect of any EU (and German) embargo on the price of oil after any initial shock subsides in some days or perhaps weeks, the fact is that right now a surplus of oil is already expected in the market this Spring and into Summer. The futures market forward price, a couple months out, is actually lower than today. Why is this?
This is because ther are 200 million Chinese who have been on Covid lockdown, and the predictions for economic activity, for Covid recovery of many economies, including Europe have been reduced. So, in general, there will be soft demand.
On the other hand, besides the point about OPEC and the USA being able to rather quickly (OPEC) and over time (USA) supply more oil, and the ability to release large amounts of Strategic Petroleum Reserve oil rapidly (there are a total 1.5 billion(!) barrels in the SPRs of the IEA/OECD states, which the EU can acess) …
… the other reality is that the Russian oil which will be enbargoed from sale to Europe will, to some degree, be sold by Russia “out the back door” to Chiina and India. It will be sold at a steep discount of perhaps $35 to $40 per barrel – at suffer higher transportation costs – and Russia will end up with much less oil revenues to pursue its war in Ukraine, However, since oil is one global market [Note: hence the name of this blog -T.OD.], this fraction of the Russian oil that was formerly sold to the EU (or to the USA) that till instead be sold to China and India will actually reduce these countries’ demand for oil from the global market and will further contribute to what will likely be a glut of oil and lower prices after some weeks or a few months following any EU embagoe of Russian oil.
The Saudis are very savey about the oil market, and I assume they are well aware of the risk of ther actually being a glut of oil in the mid- and longer-term market after any EU embargo of Russian oil. So, they are being very cautious to agree to increase their production without more information.
In short, the situation right now is quite good, about as good as it could possibly be, for the EU – including the, IMHO, overly cautious German government – to right now embargo all sales of Russian oil to Euorpe.
This would be a very big hit to Putin’s revenues he despertaly needs now that his central bank’s foreign exchange has been largely taken away from him – from the Russian war machine and the Russian economy – by USA and EU financial sanctions. This would be a great assistanc to the Ukranians.
My advice to Brussels (and especially Berlin) is take a lesson from the Ukrainian resistance: “Carpe Diem!”
Dr. Tom O’Donnell, GlobalBarrel.com, 14.03.22, Berlin.