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How US & allies’ potential sanctions on Russian oil & gas could hit life in Europe

Sanctions on energy imports from Russia could have complicated effects on oil & gas supply chains globally, and in Europe, living standards and economic activity could be impacted.

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New Delhi: Oil prices rose to $139 a barrel Monday, reaching price levels not seen since 2008, while gas prices nearly doubled, as the US deliberated with allies on banning oil and gas imports from Russia.

In December, oil prices averaged less than $70 a barrel, representing a 100 per cent hike in just three months.

Any sanctions on energy imports from Russia could have complicated effects on oil and gas supply chains globally.

With Russia being a critical supplier of oil and natural gas to Europe, sanctions could have cascading effects on living standards and economic activity across the continent.


Also read: More honesty, less grandstanding can prevent Ukraine war from ballooning into a world war


Russia’s share of oil and gas supplies

Russia is the third-largest oil supplier in the world, with the US and Saudi Arabia being the only countries to produce more.

According to data from Eurostat, Russia is the largest supplier of oil to the European Union, while also being the primary provider of petroleum oils.

Nearly 2.5 million barrels of oil per day are shipped from Russia to the European countries. This represents almost half of Russia’s per-day oil exporting capacity.

Oil is exported to Europe from Russia via a combination of pipelines and shipping networks. The Druzhba Pipeline through Belarus accounts for nearly 7,00,000 barrels supplied per day to Europe.

Russia accounts for nearly 40 per cent of Europe’s natural gas demands. Russia is also the second-largest supplier of natural gas globally, accounting for 16.6 per cent of global natural gas supplies in 2020.

Calls for sanctions on oil, but not natural gas

Given this context, many analysts are calling for the US and allies to sanction oil imports from Russia and not gas. Several factors are contributing to this rationale.

First, oil is a fungible commodity, its supply chains are easier to reroute and configure than gas. Oil supplies from countries like Norway and Saudi Arabia could be reconfigured to be sent to Europe to compensate for shortfalls from Russia, in the short term at least.

Second, finding new sources for natural gas and ensuring a robust supply chain to Europe will be highly complicated. The transport of natural gas is a multi-layered process. To ship natural gas, it must first be cooled down and converted into liquid form; then it has to be reconverted into gas at its destination port. Setting up such a supply chain system will be a logistical nightmare in the short run.

Third, sanctions against oil imports would have a far greater impact on Russia’s economy. Oil receipts account for a greater share of Russian revenue than natural gas exports. Oil exports also provide more funding for Russia’s budget. In 2021, Russia earned over $170 billion through the export of oil and oil products. The sale of natural gas brought in roughly $55 billion.

Essentially, an oil embargo will hurt the Russian economy far more than a gas embargo. Looking at its fungible nature, oil will be far easier for European countries to source from replacement markets than natural gas, thereby leading to calls for an oil embargo and not a natural gas one.

Replacement barrels

Restrictions on Russian oil exports could be offset by countries releasing more quantities from their strategic reserves. The US is already selling 30 million barrels from its strategic petroleum reserves. More states could tap into selling their reserves to counter any shortfalls in the short run.

Countries like India and China had also released barrels from their reserves to prevent any massive fluctuations in barrel prices prior to Russia’s invasion of Ukraine.

Iran could also be a potential supplier if sanctions against its oil sector are lifted. However, it could take months for Iran to ramp up capacity and ensure sufficient supply.

A lot will hinge on the Organisation of Petroleum Exporting Countries (OPEC) countries, and whether they agree to release more barrels into the market. Despite calls for enhancing production and providing more oil supply to Europe, OPEC agreed to only a slight rise in oil supply for April.

Out of the OPEC states, it is assumed that Saudi Arabia, Kuwait, and the UAE have enough capacity to enhance production soon.

(Edited by Nida Fatima Siddiqui)


Also read: Modi appreciates ‘continuing dialogue’, but asks Putin to directly talk to Zelensky


 

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