Opinion: Banning Russian oil exports might hurt Europe far more than the U.S. or Russia - and Vladimir Putin knows that - The Globe and Mail

The shadow of a worker next to a logo of Russia's Rosneft oil company, in Nefteyugansk, Russia, on Aug. 4, 2016.Sergei Karpukhin/Reuters

Just under two years ago, when the global economy was pretty much shut down in the panicky first wave of the pandemic, oil prices actually went below zero. On Monday, they shot north of US$130 a barrel and almost hit US$140 at one point.

Natural gas prices rallied by 30 per cent, reaching an all-time high. According to Bloomberg, the benchmark Dutch wholesale price reached US$470 a barrel oil equivalent. That is not a typo.

The latest price driver?

Over the weekend, U.S. Secretary of State Antony Blinken, who was on a whirlwind tour of NATO countries in Eastern Europe, told the media that the White House was in “very active discussions” with European allies about banning Russian oil exports to the United States and Europe. An oil export ban has bipartisan support in the U.S. Congress.

His admission put the energy markets into near panic. While many energy strategists and analysts suspected that soaring prices were inevitable as the war in Ukraine war entered an ugly phase dominated by the bombardment of cities, others thought that prices would not explode because Western governments would be forever reluctant to ban a crucial source of energy: Russia is the world’s third-largest energy producer.

You can’t blame the doubters. As recently as last Thursday, the White House was playing down the likelihood of slapping an oil-export ban on Russia. And Europe, which has few domestic reserves of oil and natural gas, was resisting a ban. Russian energy exports had been exempt from sanctions, still are – but for how much longer?

In recent days, the moral argument to ban oil, and possibly gas, exports began to displace the economic argument to keep Russian exports untouched to protect families and business from a price shock. That position became increasingly untenable because energy exports are financing Russia’s war in Ukraine, to the point of cringing moral absurdity: as energy prices rose, Russia earned more export revenue to pay for its destruction of Ukraine.

Ukraine’s Foreign Minister, Dmytro Kuleba, summed it up succinctly when he said Russian oil “smells of Ukrainian blood.”

A US$10 increase in oil prices boosts Russia’s current account inflow by about US$20-billion a year. For Russia, war had never been so profitable. Oil of the Brent crude variety is now up 80 per cent in a year – gas far more – and energy accounts for about half of Russian exports. Now you know why Kremlin dwellers are smiling, or were until Mr. Blinken said that sanctions on Russian oil might be coming.

The question is whether an oil, and possibly a gas, export ban would hurt the West as much as Russia. What we know already is that the pain on Europe would greatly exceed the pain on the United States and Canada.

Thanks to the shale oil boom, the United States is a net exporter of crude oil and oil products (that is, it exports more than it imports), though not by a large amount. Since Russian crude oil imports are about 3 per cent of total American oil imports, banning them would hurt Americans only a bit.

Europe is not so blessed with homegrown supplies, which explains its reluctance to go whole hog on an import ban. According to the International Energy Agency, about 60 per cent of Russian oil exports go to Europe, and those exports account for a third of Europe’s oil demand (in November, Europe imported 4.5-million barrels a day of oil and oil products from Russia).

Europe is overly dependent on Russian gas, too, and the prospect of European gas shortages has put the gas markets into a tizzy. Royal Bank Capital Markets said Monday that gas futures for delivery in Europe or Britain were trading at 20 times to their U.S. equivalents. The enormous transatlantic price differential was not just a short-term phenomenon. One year out, European price futures were trading at five times higher than U.S. gas futures.

So Europe will enter the house of pain if Russian oil or gas exports are curtailed, let alone banned. The United States, not so much. Europe might even go into recession, since more often than not, soaring energy prices have preceded recessions. Certainly, inflation will remain high.

What about Russia?

There is no doubt a North American and European export ban would hurt. Already, the Russian energy markets are in trouble even though energy remains exempt from sanctions. According to Energy Intelligence, Russian oil exports had fallen by a third or more by last week even though Russian crude sells at a significant discount to Brent crude. Banking sanctions are behind the sharp downturn, plus the country’s pariah status. If non-Russian oil can be found, it will be bought.

To be sure, a European oil embargo would really hurt Russia – if it comes. Europe is so highly dependent on Russian oil and gas and a full import ban seems unlikely, perhaps even economically impossible. For Europe, the ugly reality is that many big European countries, especially Germany and Italy, slept-walked into creating economies that became ever more dependent on Russian energy exports, to the point Germany is shutting its nuclear reactors.

Yes an oil export ban will hurt Russia, but it will hurt Europe even more. Mr. Putin knows this.

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2022-03-07 12:03:01Z
CBMiggFodHRwczovL3d3dy50aGVnbG9iZWFuZG1haWwuY29tL2J1c2luZXNzL2NvbW1lbnRhcnkvYXJ0aWNsZS1iYW5uaW5nLXJ1c3NpYW4tb2lsLWV4cG9ydHMtbWlnaHQtaHVydC1ldXJvcGUtZmFyLW1vcmUtdGhhbi10aGUtdXMtb3Iv0gEA