[ENG] The EU embargo on Russian oil products

Price cap and embargo

The G7 countries, Australia and the EU approved a USD 60 per barrel price cap on Russian crude oil. The EU banned seaborne Russian deliveries, which account for 90% of imports. From February 2023, the EU will also ban imports of other oil products. In this section, we discuss the impact of the embargo on the global and Russian market and the EU’s readiness to ban Russian oil.

In 2021, 45% of the Russian budget’s revenues came from profits from oil exports. At the current price cap level, Russia would earn about USD 10-15 billion per month, far less than the USD 21 billion Russia earned in June, when the price of a barrel of Brent crude exceeded USD 120. The price cap (USD 60 per barrel) is equal to current price of Russian oil. The decision will prevent additional earnings if the global oil price increases. As retaliation,Russia is threatening to halt oil deliveries to the EU.

Impact on commodity markets

The EU embargo has had a relatively low impact on commodity markets. The price of Brent oil is currently the lowest since the beginning of the year. Furthermore, contracts with delivery due in2023 year suggest further drops. Commodity traders expect the oil market to move into a period of oversupply, despite low global oil stocks and refining capacity shortages. This is an effect of the economic slowdown in advanced economies. Furthermore, the EU has already decreased Russian crude imports since the beginning of the war. Therefore, the economic consequences of the embargo are not that big.

The EU's dependency

The EU is highly dependent on imports of oil products. The EU imports almost 20% of road diesel and 17% of crude oil from Russia. Europe can handle crude oil shortage thanks to the alternative sources of supply. However, Europe has reduced refining capacity by nearly 3 million barrels per day since 2005; that is, by more than 17%. Limited production at refineries and relatively high diesel consumption may lead to problems in coming months.

Fuel shortages in the EU

We do not expect fuel shortages in EU countries following the embargo. Price increases are more likely to be linked to the rollback of price mitigation policies (such as a return to higher VAT rates) than the ban on Russian crude oil. The current problems in Hungary were caused by the technical shut down of the main refinery and the fuel price regulation blocking the possibility of imports. These problems are temporary, but the EU needs to prepare for the next months of 2023 to avoid distillate supply shortages.

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The text was published in CEE Economic Monthly 9/2022 on the 5th of January 2023.