Yoselina Guevara
The Deputy Prime Minister of the Russian Federation, Alexander Novak, warned this Monday, March 7, that the ban on Russian oil imports would have “catastrophic” consequences for the world market. In fact, the sanctions that Western countries are imposing on Moscow for the special military operation it is carrying out in Ukraine have managed to alter in a surprising way the oil market and have taken prices to record levels, which have not been seen since June 2008.
For this March 8, Brent Oil (international reference) is quoted at 127.32 dollars and WTI Crude Oil (reference for the U.S. market) at 122.81 dollars per barrel. These portray the upward spiral in prices, whose trend could reach 200 dollars per barrel, more than tripling the 60 dollars per barrel on December 1, 2021. All this automatically translates into higher fuel costs, especially in the United States, one of the countries with the highest gasoline consumption and where the population tends to travel long distances by car and public transportation is uncommon in many parts of the country.
By Monday, March 7, in some U.S. states prices ranged from four to five dollars per liter, but dragged with them the increase in basic necessities, which is undoubtedly a political problem for Joe Biden’s administration, which is already struggling with high inflation.
The main cause of this rise in oil prices lies in the growing fear in the markets of a possible blockade of Russian oil; this panic is based on the statements and actions emanating from the government of the United States and the European Union (EU), who insist on saying that they are working on the application to Russia of a package of sanctions covering the energy area, from where Moscow mainly feeds its Gross Domestic Product.
Russia, an oil colossus
Russia produces about 11.3 million barrels per day, compared to 17.6 million for the United States and about 12 million for Saudi Arabia; this places it among the main crude oil producing countries. The Russian Federation is estimated to use about half of this production for its own domestic demand. This oil colossus is the largest exporter of oil to world markets, with 7.8 million barrels per day as of December 2021, divided into five million of crude and condensate and 2.85 million of refined products. Of these Russian exports 60% goes to European countries and 20% to China.
Repercussions of a blockade on Russian oil
According to specialists, if Russian oil exports to the United States and Europe were to be interrupted, refineries around the world would lose 5% of their supplies, while the total amount of refined products would be reduced by 10%; this would be a real catastrophe that would generate an energy and economic crisis with an inflationary spiral that would be difficult to solve.
Since oil is a relatively fungible global commodity, much of Russia’s crude oil exports to Europe and other G-7 participating countries could end up being shipped elsewhere. While this would free up other supplies from sources such as Norway and Saudi Arabia for redirection to Europe, there is no certainty that the entire market, especially the European market, can be covered.
On the other hand, sanctions against the Russian oil industry could have a greater impact on the Moscow government, because the country’s oil revenues are greater for its state budget than profits from gas sales. In 2021 Russia earned more than $110 billion from oil exports, twice as much as its revenue from natural gas sales abroad.
Replacing Russian crude oil
Russian oil imports as a percentage of the total imports of European countries are decidedly high, accounting for 34% of the continent’s needs. According to the International Energy Agency, around 60% of Russian oil is destined for European countries and there are some nations that depend predominantly on Putin’s crude, in particular Lithuania (83%), Finland (80%) and Slovakia (74%), while among the main markets, Germany’s 30% and Holland’s 23% stand out.
As can be seen, replacing these huge volumes of crude oil that Russia supplies to Europe is extremely difficult. The oil market is already tight, i.e. demand is higher than available supply, either because of the sanctions imposed on Venezuela or other circumstances. The only two major producers that could significantly increase production in the relatively short term are Saudi Arabia and the United Arab Emirates. In the immediate term, any contribution from Iran and Venezuela would be minimal. Washington’s ongoing talks with Caracas are probably aimed at the near future and at preventing Russia’s expansion in Latin America.
The United States, despite its status as an energy superpower, can do little; analysts agree that U.S. oil companies are reluctant to increase production to avoid being caught in a new boom and bust cycle. This means that real growth in North American crude oil production will take between six and 12 months. Political decisions resulting from arrogance and arrogance could plunge the United States and above all Europe into a bottomless abyss; moderation, dialogue and conciliation will always be good advisors, but to put them into practice, true leaders, statesmen and visionaries are needed.
Yoselina Guevara Correo del Alba’s Venezuelan Correspondent in Italy
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