What is the potential impact on Europe of the embargo on Russian oil?

The European Union has proposed a gradual embargo on Russian oil, tightening sanctions against Moscow for its invasion of Ukraine. Reuteres raises the question of what would be the implications of banning Russian barrels in Europe?

What is the EU importing?

The European Union imported 2.2 million barrels of oil per day and 1.2 million barrels per day of refined products before the war in Ukraine, according to the International Energy Agency (IEA).

Cars

Refilling your car will probably become more expensive. Europe imports not only crude oil from Russia, but also refined products, such as diesel for industrial and passenger vehicles. Importing diesel further away from Russia will mean higher transport costs and, consequently, higher prices at service stations. In Germany, for example, 74% of pre-war diesel imports came from Russia, according to FGE Energy.

Refineries dependent on Russian oil

Russian oil accounts for one-fifth of refined oil in Europe, according to the IEA. Some refineries producing gasoline to aircraft fuels, such as the German PCK Schwedt and Leuna, as well as refineries in the Czech Republic, Hungary, Slovakia and Poland, are supplied with Russian oil via the Druzhba pipeline.

Supplies along the Druzhba have fluctuated sharply in recent years, with deliveries reaching 1.5 million barrels per day, while falling in recent months to about 0.8 million barrels per day in February.

Poland can switch to maritime supplies from places such as Saudi Arabia or Norway via the port of Gdansk on the Baltic Sea.

PCK Schwedt, which supplies cars and airports in Berlin, and Leuna near Leipzig could get some oil from Rostock, much less a hub for crude oil than Gdansk, but not enough to run at full capacity.

Poland, which is trying to replace all Russian crude at its refineries, could divert some of its oil from Gdansk to these two German refineries, but details have not yet been determined.

The change in these supply routes will probably mean higher raw material prices for Germany’s two largest refineries, which will lead to higher prices for final consumers.

For all refineries in countries that do not have access to ports, replenishing zero oil through Druzhba will be a huge undertaking. More expensive and less efficient freight, rail, river or future expansion of other pipelines, such as the TAL, which runs from the Mediterranean via Austria to Germany, may be required. Such an extension still needs approval from the German authorities.

Slovakia, Bulgaria and the Czech Republic are seeking exemptions from an imminent EU embargo on Russian oil to formulate such alternatives, while Hungary does not support the plans due to fears for its energy security.

Can Russian crude be replaced with any other oil?

Refineries are usually tuned to operate on a specific type of crude, such as Russian Urals. Other types of crude oil from Norway, the Middle East, the USA or West Africa can be mixed or adapted to these refineries, but this can change the efficiency of a refinery and cost more money in addition to higher transportation costs. Traditional consumers of Russian oil will also now have to compete not only with each other for alternative oil imports but also with existing customers in Asia.

Globally, refining capacity is shrinking as people try to reduce their dependence on oil-based fuels. Morgan Stanley estimates that capacity has shrunk by up to 2.7 million barrels a day since the onset of the coronavirus pandemic.

Transitional period

EU countries have until the end of the year to prepare for the disruptions and are likely to fill warehouses in areas near refineries that may be in trouble.

If Russia cut off supplies first, it would cause serious disruption.

Germany has warned of a recession without Russian oil and gas.