A western embargo on Russian oil and gas is no longer unthinkable after the US secretary of state, Antony Blinken, revealed that the idea was gaining traction in the White House and had been the subject of “very active discussion” with allies.
The reaction was dramatic, with Brent crude oil hitting levels not seen since 2008, while gas soared to all-time highs as traders considered whether it could be thrown into the mix too.
Pushback from Germany’s new chancellor, Olaf Scholz, came as no surprise given his country’s heavy reliance on Russian oil and gas. “Supplying Europe with energy for heat generation, mobility, electricity supply and industry cannot be secured in any other way at the moment,” he said.
Meanwhile, consumers’ money is funding the war in Ukraine. EU oil purchases alone are putting $285m (£217m) a day into Russian pockets, according to the Brussels-based NGO Transport & Environment. So how realistic is a ban and how high could prices go?
How important is Russian oil and gas?
Up to 40% of Europe’s gas comes from Russia, a reliance that has already been in sharp focus during the colder winter months. As warmer days arrive and the immediate need for gas diminishes, it should be remembered that the picture is not all that different for crude oil and other petroleum products. About 5m barrels per day (bpd) flow out of Russia, the world’s second largest exporter after Saudi Arabia.
About half goes to the EU, which relies on Russia for 27% of its imports and about 15% of its total consumption. The UK is less dependent, importing 4.7m tonnes of Russian oil in 2021, just under 100,000 bpd, which was less than 10% of consumption.
But, as with gas, the UK cannot escape the impact of global market prices for commodities, which would filter through into much higher costs for ordinary people.
Can it be replaced?
Solving the gas conundrum is tough enough, involving a combination of increased production from elsewhere, reducing demand, buying more liquefied natural gas (LNG) and pushing harder on renewables and nuclear.
Throwing oil into the bargain only adds to the headache. “A disruption on such a massive scale cannot be met by other producers, at least not for the foreseeable future,” said Ole Hansen of Saxo Bank.
One option under discussion is for the US to lift sanctions on Iran and Venezuela. “Iran could add about 1.3m bpd of additional oil into the market,” said Sophie Udubasceanu, a global crude oil expert at ICIS. But she warned that contribution from Venezuela relied on the country solving persistent output problems.
America’s own reserves offer some hope. The US exported 3.45m bpd in December last year and could increase that. None of this could happen quickly. “Raising production from these producers would take months for Iran, quarters for the US and years for Venezuela,” said Hansen.
Another route is to convince Opec, the cartel of oil-producing nations such as Saudi Arabia, to loosen the taps. Only last week though, with the Ukraine invasion in full swing, Opec stuck to a meagre 400,000 bpd increase.
It depends on the geopolitical reality. The all-time high is $147.50, set in July 2008, and some analysts think it could go higher.
The UBS commodity analyst Giovanni Staunovo said a prolonged war could take the price above that record, to $150 or more. Analysts at Bank of America said that if most of Russia’s oil exports were cut off, the resulting 5m bpd shortfall could push prices as high as $200.
There is a saying that the best cure for a high price is a high price, a reference to the concept of demand destruction. If oil gets so expensive that people cannot afford it, they stop buying and the price comes down again. However, that most likely means measures such as industrial shutdowns, causing a significant downturn in economic activity and, very probably, recession.
Jim Watson, a professor of energy policy and the director of the UCL Institute for Sustainable Resources, said: “We urgently need to a new programme to upgrade and insulate our homes after a decade of inaction and poorly designed policies. The [UK] government should also keep its foot on the renewables accelerator – and continue to expand investment in low-cost sources of electricity such as solar and wind.”
While this approach would reduce reliance on Russia, it would take some years to come to fruition – potentially even longer than finding new supplies of gas and oil. There are no easy answers.
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