How will Russia’s sanctions affect raw material exports

It is probably no coincidence that Russia has decided to invade Ukraine at a time of extreme tension for energy markets. Natural gas prices in Europe reached record highs before the invasion, trading above $ 300 a barrel, or 10 times the historical average. For many professionals, oil prices were destined to surpass historic highs in 2022 due to very low oil stocks, minimal spare production capacity and expected supply shortages in the coming years.

The only counter-force in the short term – apart from government-imposed demand-cutting measures – is the destruction of demand, which comes at higher prices along with a weaker economy.

In the context of the recent past, how much prices could rise, Brent crude averaged $ 111 a barrel between January 2011 and July 2014, up from about $ 150 a barrel today after adjusting for inflation. Despite the European debt crisis at the time, these prices did not have a significant impact on demand. However, they encouraged the shale revolution in the United States, which subsequently cut prices as supply growth grew significantly higher than global demand.

Higher oil prices in the delayed months of the futures curve will lead to an increase in oil supplies within 12 to 24 months in brownfields of existing production, but the response time is likely to be slower than in the past due to the supply chain and labor
supply problems.

Major new projects will not come to the rescue due to lack of investment. And now sanctions against Russia’s energy exports are being seriously considered. This will cause economic costs for consumers, albeit lower than the alternative to ongoing bloodshed and war crimes in Ukraine and potentially abroad. The Russian regime with its Stalinist game must be stopped or at least limited.

What would be the impact of a full EU embargo on Russian oil? Russia exports about 8 million barrels a day of crude oil, condensate and refined products worldwide, of which 4.5 million go to Europe. Most of the Eastern European refineries are landlocked and powered by the Druzhba gas pipeline and have no alternative sources of supply. If there was an EU embargo that did not include
exports through Druzhba, Russia would try to find alternative buyers for 3.5 million barrels a day, but would face logistical problems such as a shortage of Aframax ships serving its ports. .

As a result, it will probably not be able to find buyers for 2-2.5 million used cars. Losing 2.5% of global supplies would be a difficult but not impossible task. The visibility of such a loss of supply would encourage producers with spare capacity to use it immediately and American producers to increase production significantly. Higher prices or government mandates to limit energy use may lead to some reduction in demand. A coordinated global release of strategic reserves would also give the market time to adapt.

The ideal goal would be to reduce Russian revenues by minimizing the impact on oil flows. Two solutions could achieve this. The first would be for the EU to impose a ceiling on prices for Russian crude oil and petroleum products that are low enough to limit military investment but high enough to encourage Russia to maintain production and sell to European buyers – perhaps around $ 50 per barrel. A similar effect can be achieved through a high European tax on Russian oil, as economist Ricardo Hausman advises. Reduced competition for Russian energy would encourage Asian buyers to seek discounts as well.

Another solution would be to pay market prices, but with $ 50 per barrel directly for Russian companies, and the rest of the escrow accounts. The escrow money will then be released in Russia – excluding the cost of rebuilding Ukraine – after restoring confidence in the Russian regime. These solutions could, of course, be extended to natural gas and coal.

Russia may refuse and decide to reduce all energy exports to Europe. As a result, however, it will not receive money from Europe and will lose all its price strength due to the lack of competition for its exports. This scenario would not be ideal for either country. Europe will be forced to adapt and speed up its energy transition. Russia will receive much lower revenues and lose its largest customer forever.

In any scenario, it would be wise for Europe to put its economy at war to speed up its energy transition, strengthen its defense industry, become more independent and work closely with North America on energy security. .

 Dealer Veselin Zlatev

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