Why the EU wants to hit Russian oil instead of gas: the Skywall

Replacing Russian oil may be easier than blocking natural gas. But the risk is a further global rise in energy prices. The Skywall

The European Commission’s proposal to block imports of Russian oil, if confirmed by member states, could do a lot of harm to the Russian economy. Contrary to what we tend to think, oil for Moscow represents a much higher income than natural gas. According to data from the Russian Ministry of Economy, since the former (including related refined products, such as diesel and plastics), Moscow has grossed almost 180 billion dollars last year. While revenues from natural gas amounted to about one third. Numbers that will vary upwards this year, but which in the proportions should remain almost unchanged.

Because Brussels wants to start with oil

At the same time, it is easier for Brussels to replace Russian oil than to achieve the same result with gas. In fact, crude oil is transported mainly by ship, and not by gas pipelines which inevitably limit the flexibility of trade.

Global price rise risk

On the other hand, however, the ease of exchanging oil makes the crude oil market global, with a very similar price all over the world. This is why for the EU the problem to be faced with a Russian embargo could concern more the price than the volumes of oil. Reducing global supply could cause prices to rise worldwide, as Russian production cannot be replaced anytime soon, according to OPEC. With the undesirable effect that Moscow could sell less oil, but at higher prices, thus reducing lost revenue.

EU less dependent than on Russian gas

Focusing on volumes, the European Union is less dependent on Russian oil than on natural gas. The average – between crude oil and refined products – was 22 percent in 2020 according to Eurostat data. Germany was just above the average – 29 percent – while Italy and France were below. The countries of Eastern Europe, on the other hand, are among the most vulnerable, in particular Slovakia and Hungary which are connected to Russia by oil pipelines.

Western “self-sanctions”

These percentages have already been reduced in the first months of 2022. Western energy companies have in fact already reduced purchases of Russian oil, even in the absence of EU embargoes, for fear of reputational repercussions and sanctions. This is why Russia itself predicted – even before the EU Commission proposal – a 17% reduction in crude oil production in 2022 compared to the previous year.

Those who continue to buy Russian oil – European countries such as Germany and Greece, but also India and China – are doing so at very advantageous prices. Indeed, Russian oil has less and less market and buyers can negotiate lower prices. The difference in the prices of the Urals, Russian oil, and the WTI, the American price, has gradually widened after the Russian invasion.

There is oil and oil

However, the difficulties of replacing Russian oil for the EU do not stop at prices and volumes. In fact, the continent’s refineries cannot use any type of crude oil to produce refined products, such as diesel. There are several types of oil, heavy or light.

An interesting case is for example that of Priolo Gargallo, in the province of Syracuse. Here is one of the most important refineries in Italy, owned by Lukoil, the Russian oil giant. If the embargo is confirmed, alternative crude oil to the Russian one will have to arrive here to save the jobs of 3,500 employees and not cause supply problems to Sicily, whose petrol stations depend on this refinery.