Europe’s decision to ban the vast majority of Russian oil imports has the potential to remake global markets. What it means for the climate is less certain.
Analysts said the announcement this week from the European Commission that it would ban Russian seaborne crude imports has the potential to alter trade flows, hinder Russia’s oil industry and contribute to a sustained period of high crude prices. That level of disruption could prompt serious attempts to green global energy systems.
But whether the world takes the opportunity to transition to cleaner fuels is an open question, observers said.
In Europe, where leaders have doubled down on their pledge to supercharge deployment of renewables, electric vehicles and heat pumps, countries face urgent logistical and technological challenges to their green ambitions. Siting reform is needed to ensure wind and solar projects can be built. Electric vehicle manufacturing needs to rapidly expand. And new technologies, like green hydrogen, must be perfected to offer alternatives to hard-to-green sectors of the economy like industry.
The rest of the world’s challenges may be even more daunting.
The United States lacks Europe’s political commitment to climate action, as seen by stalled attempts to pass climate legislation in Congress. Emerging markets face the challenge of rising interest rates and a strengthening dollar, making an already expensive transition even pricier. And while rising oil prices make alternatives more attractive financially, they also make the politics around energy more volatile. Consumers become particularly attuned to perceived increases in energy bills when prices are already high.
“High prices tend to expel incumbent politicians faster than they encourage new technology,” said Kevin Book, a managing director at ClearView Energy Partners LLC, a research firm.
Europe’s ban on most Russian oil imports is significant because of its potential role in global oil markets. In 2020, Europe accounted for 14.5 percent of global oil consumption, according to BP PLC’s most recent Statistical Review of World Energy. Much of that oil comes from Russia, which competes with the United States and Saudi Arabia as the world’s leading crude exporter.
ClearView estimates roughly 45 percent of Russian oil exports were shipped to Europe in 2021. Seaborne shipments delivered via oil tankers accounted for about two-thirds of Russian exports to Europe.
The embargo, part of a sixth round of sanctions aimed at preventing Russia’s ability to finance its war in Ukraine, does exempt oil that arrives via pipeline. But European Commission President Ursula von der Leyen said yesterday she expected the ban would grow to encompass 90 percent of all Russian imports once Germany and Poland cease pipeline deliveries by the end of the year.
Europe is served by the Druzhba pipeline, which supplies Russian oil to Germany and Poland in the north, while a southern spur sends oil to Hungary and Slovakia. Oil will continue to flow to those countries for the time being, though how much longer remains to be seen.
“This is a topic we will come back to,” von der Leyen said Monday in announcing the embargo. “But it is a big step forward from what we did today.”
The world has already seen a shift in the oil trade since Russia launched its invasion of Ukraine in late February. European buyers have pulled back while Asian nations have purchased rising amounts of Russian oil. India, in particular, has emerged as a growing market for Moscow, with its Russian imports growing from less than 50,000 barrels a day last year to 500,000 barrels a day this year, according to a recent analysis by researchers at Columbia University’s Center on Global Energy Policy. China has also gradually increased its Russian imports.
“I would definitely say this is a major moment. It’s not your usual rerouting of trade flows. This is Europe looking to back out its largest supplier and to do so permanently,” said Abhiram Rajendran, an adjunct research scholar at Columbia and research director at Energy Intelligence. “From the Russian standpoint, they would be looking to see how much they can permanently reorient to India, China and any more smaller buyers.”
There are limits to how far that reorientation can go.
The Europeans are likely to look to the Middle East and countries lining the Atlantic Ocean, including the United States, to replace the barrels they lose by banning Russian oil. But many European refineries are not set up to process the type of light, sweet crude typically exported from the United States, meaning most of the oil replacing Russian crude is likely to come from the Middle East.
Europe may find it difficult to find enough oil to plug the gap left by falling Russian imports, said Rajendran, adding, “Demand adjustment is going to be part of the equation.”
Asia, meanwhile, can only soak up a limited amount of Russian oil. India has looked to buy Russian crude because it is selling at a discount compared to the varieties it typically buys from the Middle East. Yet Russian crude, while similar to Middle Eastern oil, is not a one-to-one replacement, meaning there are limits to how much Russian oil can be processed by refineries in India.
China is also interested in maintaining a diversity of oil supplies and avoiding becoming overly reliant on one country, placing a ceiling on its Russian purchases.
‘Full squeeze’
The Columbia researchers think roughly 1.5 million barrels a day of Russian production could be lost as a result of the European ban. In 2021, total Russian petroleum exports were 7.5 million barrels a day.
Even if Asian countries are willing to buy more Russian oil, it’s not clear tankers will ship it there. One of the most notable aspects of the European sanctions is a ban on insuring tankers that are laden with Russian oil. The sanctions were coordinated with the United Kingdom. As much as 95 percent of the global tanker fleet is arranged through London-based insurance providers (Climatewire, May 5).
“This element of it is going to put a squeeze on Russia in a way we haven’t seen in prior bans,” said Paasha Mahdavi, an associate professor of political science at the University of California, Santa Barbara, who studies environmental politics and oil markets.
While the lack of insurance will make it harder to transport Russian oil, the history of Iran and Venezuela suggests Russian crude will still make its way to market.
“We’ve had some of the harshest sanctions on Iran since 2016. Last time I checked, the ayatollah’s still in power,” Mahdavi said. “It’s hard to put the full squeeze on oil exports.”
The global disruption emanating from Europe and Russia is likely to keep energy prices high. In that environment, the focus shifts to the world’s response. High oil prices traditionally have spurred more investment in oil production. Yet high prices also give governments and consumers a reason to consider alternatives.
The challenge is that many of them are still in their infancy. Electric vehicle adoption is growing rapidly, but the global automotive industry will need to be retooled to accommodate that transition, said Alex Dewar, an analyst who tracks energy markets at the Boston Consulting Group. Supply chains that provide the minerals for EV batteries need to be expanded, and EV manufacturing needs to grow.
That will take time, whereas new oil supply could be brought online relatively quickly, he said. What the world chooses to invest in will ultimately decide the trajectory of the energy transition.
“What’s stronger here, the demand-side impact of moving away from oil production, or supply-side investment to produce more?” Dewar said.
Analysts said the world’s response could differ regionally, with richer nations pouring money into the energy transition while developing countries look to fossil fuels to supply their energy needs.
Nations with smaller economies already faced the challenge of attracting capital from investors who are worried about spending money in countries perceived to have higher political challenges. Those challenges are punctuated by rising interest rates, making it more expensive to borrow money and finance transition plans, analysts said.
Many countries are likely to stick with the energy sources they already have rather than investing in alternatives. That dynamic has already been on display as Europe rushed to snap up shipments of liquefied natural gas to replace its imports of Russian gas. That in turn has led to an increase in coal generation, particularly in Asian countries that are reliant on LNG (Climatewire, April 1).
“It is a profound illustration of development levels and the environmental capabilities of rich economies compared to poor ones,” Book said.
“What spare capacity did the world fall back on when Russian energy fell short? The answer was not solar panels or renewable resources. We are not at the point where there are clean molecules and electricity can address a shortage of legacy fuels. We fell back on fossil fuels.”
Reporter Sara Schonhardt contributed.
This story also appears in Energywire.
