What are the consequences of embargo on Russian oil?

On Monday, May 31, the leaders of the European Union decided to impose an embargo on Russian oil. This will block more than 90% of imports by the end of 2022. What consequences does this have for the consumer?

European leaders reached an agreement last night on a sixth package of sanctions against Russia after the invasion of Ukraine on February 24. After difficult negotiations, Europe finally imposed a gradual embargo on the important Russian oil. Member states now have 6 to 8 months to find solutions, as the agreement stipulates that 90% of Russian oil will no longer be imported by the end of the year.

“We want to stop the Russian war machine and we want to reduce the Russian military force, ” said the president of the European Council Charles Michel after the negotiations. The agreement was not easy to find, as Poland, the Czech Republic, Slovakia and Hungary were opposed given their dependence on the Russian Black Gold. In the end, an agreement was reached by granting these countries a transitional period.

The agreement stipulates that the embargo will cover both imports by sea but also pipelines, as some EU countries are more served by supertankers and others by pipelines, such as Germany, Hungary, the Czech Republic or Poland. Belgium, for its part, receives all its Russian oil (29% of our diesel) by sea.

However, an exception has been found for countries not bordering the sea, such as Hungary, Slovakia and the Czech Republic, so that they can find alternatives. For them, the transition period remains to be determined and will be formalized in the agreement that the ambassadors have been asked to draw up in a text that will serve as the legal basis for the embargo. However, we already know that the Czech Republic will have an 18-month exemption for its diesel imports. And that’s still a lot.

Since Germany mainly depends on pipelines, the government disagreed. For Belgium, this compromise is acceptable according to our Prime Minister Alexander De Croo. “Exempting pipelines from the embargo is a good solution,” he said on the sidelines of the summit.

It is now difficult to assess the impact of this embargo on consumers and motorists in general. What is certain is that this blockade of Russian oil is unlikely to appease the markets. After all, Europe, which is a major consumer of fossil fuels, will have to turn to other producers who, of course, will take advantage of this increased demand to raise their prices. Conversely, it is logical to expect Russia to export its oil elsewhere, at reduced prices. This would obviously generate savings at two speeds: some will pay more for their energy and others cheaper.

In addition, Russia could also finish off Europe too quickly and simply turn off the tap, as it has already done for gas supplies to Finland and the Netherlands, for example. This could cause a flurry of panic resulting in a price explosion and perhaps temporary shortages, especially for diesel, of which Russian imports in Belgium account for 29%. At the beginning of the holiday season, this is not a pleasant prospect…

Frank Vranken, head of strategy at Edmond de Rothschild Europe-Luxembourg, indicated a few weeks ago that a return to normal gas prices would take at least two or three years. For Petroleum, the expert indicated that it can be done faster, as there is no need to invest in new infrastructure. Let’s hope he’s right…

The embargo on Russian oil, by the way, is not the only sanction in this sixth package. The agreement also provides for the withdrawal of Sberbank from the Swift international payment network and the sanctioning of three Russian broadcasters and several dozen individuals or organizations associated with the war crimes committed by Russia. Enough to always increase the tensions a little more. Yes, the war in Ukraine is a continuer, as is the ensuing economic crisis.

After this agreement, the nervousness of the markets immediately manifested itself, and black gold thus reached the highest price in two months. A barrel of Brent (159 liters) from the North Sea cost $ 123.32 on Tuesday morning, or $ 1.65 more than Monday. The price of the US WTI rose by $3.47 to $118.54. It is therefore expected that there will be repercussions at the pump in the coming days or weeks.