EU’s Russia oil ban may hurt consumers more than Putin
The European Union is moving to wean itself off Russian energy, declaring on Tuesday that it would drop most of the oil it imports from Russia over its attack on Ukraine. The goal is to hurt Russia in the long term by cutting off its biggest source of revenue — fossil fuel exports.
In the short term, however, such a shift is likely to hurt consumers in the West while filling Russia’s coffers, analysts say. As evidence, they point to the effects of the U.S. ban on Russian oil and gas in March. Although that policy was aimed at further isolating Russia economically and politically, it also immediately led to a jump in global oil prices, a boon for Russian President Vladimir Putin.
The EU’s efforts to swear off Russian oil, which is expected to reduce imports by roughly 1.5 million barrels a day, has pushed the price of crude higher still. That makes the intended sanctions counterproductive in the short term, according to analysts at the Brussels-based think tank Bruegel.
“[A]s Russian oil sales to the European Union will continue for several months to come, this could very well increase Russia’s profits, providing a short-term boost to its government budget as the war is raging,” they wrote in a recent op-ed in Politico.
Matteo Villa, an analyst at the ISPI think tank in Milan, thinks that the Russian oil embargo could eventually backfire. “The risk is that the price of oil in general goes up because of the European sanctions. And if the price goes up a lot, the risk is that Russia starts to earn more, and Europe loses the bet,” he told the Associated Press.
And because the price of oil is determined by the global market for crude, higher prices in Europe will soon hit Americans as well, Troy Vincent, market analyst at DTN, told CBS MoneyWatch.
“Anything that goes on anywhere in the world will ultimately come back to impact the U.S. consumer,” he said.
Bad timing for consumers
In the U.S., the supply crunch comes at a time that oil prices typically rise — the unofficial start of summer after Memorial Day, when millions Americans hit the road for vacation.
The problem this year is that, as U.S. oil demand surges, domestic refineries are already operating near maximum capacity and have little room to increase production, Vincent said. In addition, the hurricane season is starting and is likely to cause some outages, hitting either crude oil extraction in the Gulf of Mexico, U.S. refineries on the Gulf and Atlantic coasts, or both.
“U.S. refiners are running extremely hard, facing seasonal demand and facing a very active hurricane season and potential unplanned refinery outages,” he said.
Vincent predicted that the average price of gasoline — today at $4.67 per gallon — could “easily” rise by a dollar. GasBuddy analyst Patrick De Haan predicted average gas prices would top $5 by mid-June, while a JPMorgan said it could top $6 by late-summer.
Ultimately, gas prices will come down when consumers and businesses use less gas, whether by driving less, avoiding flights or turning up thermostats— what economists call “demand destruction.” So far, while Americans have said in surveys that they’re cutting back on driving because of gas costs,
Vincent hasn’t seen the drop reflected in the data. Instead, many consumers have pared their spending on other products and services to offset the impact of soaring fuel costs on household budgets.
“Terminal decline” for Russia
Although consumers will be the short-term losers in the race to move off Russian oil, over the longer term Russia stands to suffer most as Europe decouples from its energy. Analysts say Western nations are unlikely to stop with an embargo at their borders, but will likely push to further constrain the global markets for Russian oil in the months and years to come.
“[W]e do not view the issue as done but expect continuing efforts from the U.S. and Europe to reduce Russian oil revenue from other parts of the world,” Height Securities analyst Benjamin Salisbury said in a report.
Europe’s sanctions also aim to block insurance companies that cover oil shipments, further weakening Russia’s ability to transport oil to other buyers.
If and when there is a ceasefire in Ukraine, many European nations that agreed to spurn Russian oil this week won’t be eager to restart trade relations with Putin, Vincent said.
And although “we might see India or China pick up some barrels from Russia in response, that’s not going to be enough to offset the totality of the volumes that are going to be displaced. What that means is that Russian oil production is going to be on a terminal decline,” he added.