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The EU is finally trying to hurt Russia where it hurts – Moscow’s oil revenues. But care needs to be taken not to hurt ourselves and a fragile global economy in the process.

On Monday, a ban on the import of Russian crude oil by sea came into force. It is one of the EU’s toughest sanctions yet, designed to reduce fossil fuel revenues that Vladimir Putin uses to finance his invasion of Ukraine.

Russia’s oil exports mean a lot to the world. It is the world’s second largest crude oil exporter after Saudi Arabia. In 2021, about half of those exports will go to Europe.

The war hasn’t changed much in terms of Russia’s ability to make cash from oil: So far, Moscow’s overall oil exports are running at 7.7 million barrels per day in October, According to the International Energy Agency, This is only 400,000 barrels per day less than the pre-war level. Moscow is taking away billions of dollars of fossil fuel revenue since the war began.

America and its European allies want to change that.

Here’s what you need to know as Europe and the wider world enter a new and uncertain phase of the West’s energy war with Russia.

what’s the plan?

Earlier this year, the EU agreed to ban imports Putin’s oil by sea. G7 countries and Australia have also banned the import of crude oil. The ban coincides with the introduction of a $60 price cap on Russian oil shipped to the rest of the world, which – in theory – would be enforced by the European Union and the G7. Then in February 2023, a new EU ban on imports of Russian oil products – such as gasoline, diesel and jet fuel – went into effect.

All three measures have different potential implications for Europe, Russia and the global oil price – and all carry significant risks in an already volatile economic and geopolitical environment.

What do Monday’s EU oil sanctions mean?

Starting Monday, EU countries will not be able to import Russian crude by ship, except for Bulgaria, which has been given more time to comply.

Brussels has said the European Union will ban about 90 percent of Russia’s oil imports by the end of this year. Crude oil, or petroleum, is oil in its original state – before it is converted or refined into products most people encounter in their daily lives, like gasoline.

Already this year, Russian exports to the European Union have dropped dramatically, falling 1.5 million barrels per day to a total of 3.95 million barrels per day by October, according to the IEA. Much of that European supply has been shipped to China and India.

The effect of Monday’s ban will be to complete this “reshuffle” of global oil flows, said Claudio Galimberti, senior vice president of analysis at energy research firm Rystad. “There is potential to redirect almost all the crude that goes to Europe,” he said.

If this happens, the impact of Europe’s marine crude oil embargo on global oil prices could be modest, meaning that gasoline prices for European consumers would not increase immediately. But in the coming days, the government will keep a close watch on the oil prices.

Initial market reaction was muted on Monday, with Brent crude trading at around $87 a barrel, up slightly from Friday’s prices and from its recent high of $110 in June on signs of a global economic slowdown and continued low demand in China. The reason for living is somewhat below. COVID lockdown to depress oil price.

Where will the oil flow?

“The EU will import crude from elsewhere,” said Simone Tagliapietra, a senior fellow at the Bruegel think tank. “Russia will likely increase its exports of crude oil to China and India, reducing demand for Middle Eastern oil and in turn providing Europe with more oil from the Middle East and elsewhere. Market conditions should remain pretty similar. We don’t care Should give.

Finally, the EU’s embargo on marine crude oil does not apply to oil arriving in Europe via pipelines from Russia. This means that Hungary, the Czech Republic and Slovakia will continue to receive Russian oil through the Druzhba pipeline.

Germany and Poland also receive supplies by pipeline but have pledged unilaterally to halt these imports by the end of the year. Due to its exclusive dependence, Bulgaria has also received a special temporary exemption from the Russian marine oil embargo until the end of 2024.

How does oil price cap work?

In September, G7 countries and the European Union announced plans to cap the price at which Russian oil can trade on the global market – a plan set to come into force on Monday, alongside the EU ban.

The cap would be implemented by the G7 countries. They will do this by banning their shipping and insurance companies from acting on Russian oil shipments sold above cap price. The level of the cap was subject to lengthy debate – particularly within the European Union – which eventually led to a price agreed on Friday at $60 a barrel. The cap level will be reviewed based on changes in the oil market.

But at the $60 per barrel level, the cap may not really affect Moscow’s oil revenues. Russian oil now It is trading at a low price in the global market – last week it was around $52 a barrel. That’s why Ukrainian President Volodymyr Zelensky described the measure as “weak”.

“A price cap around $60 a barrel, it won’t hurt Russia,” Tagliapietra said. “It’s not optimal from a geopolitical perspective, but it might make sense if we introduce it first, then build up pressure over time by lowering the cap.”

Non-EU ships that breach the cap will also face much softer sanctions: EU operators will not be allowed to insure, finance or service the transport of Russian oil for 90 days. Fines for EU vessels will be determined by the national laws of each country.

So what’s the matter?

In truth, the G7 cap was always intended as a means of reducing Russia’s oil income by effectively blocking Russian oil exports to the world without causing a large amount of disruption to the global market.

Without the cap, EU sanctions coming into force on Monday would hamper Russia’s ability to redirect its European oil exports to India and China, which depend on tanker shipping by EU and British insurers and other services.

Galimberti said this would have risked taking millions of barrels per day of Russian oil off the global market and would have been “a huge deal” for the price of oil.

To an extent, the oil price cap as it stands has become an inflation-controlling measure to counteract the effects of EU sanctions, as much as it has been a way to cut into Russia’s oil revenues.

How will Russia react?

Only one man really knows – and he doesn’t have a stodgy record for caution.

While Russia is likely to find new buyers for its crude, no one is underestimating the risk that Putin will flare up in response.

In recent weeks, Russian ministers have repeatedly threatened to stop selling oil to countries that cooperate with the G7’s price cap. How the cap will affect Moscow’s response to higher-than-market prices remains to be seen. But Russia has already amassed a so-called shadow fleet of aging tankers – and made inroads to set up its own marine insurance providers – to circumvent the cap, Colombia on global energy policy said Tatiana Mitrova from the university center.

Mitrova said Russia could “reduce its exports and production” to prop up the global oil price and damage its opponents’ economies.

“People believe that there should be rational economic behavior from Russia … But frankly, looking at what is happening in Russia, I would not call it rational behavior. Economic interests may be sacrificed in favor of political and military goals.

Speaking on Sunday, Russian Deputy Prime Minister Alexander Novak said the Kremlin would like to “ban” the sale of oil under the price cap – even if it meant cutting oil production. “We will sell oil and oil products to countries that will work with us on market conditions, even if we have to cut some production,” Novak said. Russian news agency TASS,

Kremlin spokesman Dmitry Peskov said on Monday that the limit would destabilize global energy markets but would not harm Moscow’s ability to continue its war against Ukraine. Reuters reported.

The reaction of other oil producing countries will also be closely watched. “OPEC understands that if this mechanism is successful, it can be applied to other cases – OPEC countries themselves may become the next target,” Mitrova said. “They are not happy with this system. They want it to fail.

The OPEC+ grouping – which includes Saudi Arabia, other major oil producers Middle Eastern, African, Latin American, Central Asian countries and Russia – met virtually on Sunday, and agreed not to change policy for now, Reuters reported.

Galimberti said he expected the core OPEC group, led by Saudi Arabia, to take a truce for now. “There’s a lot of uncertainty. We don’t know exactly what’s happening with the lockdown in China. We don’t know how many barrels Russia is going to lose.”

What about diesel ban?

Even if the world passes without major volatility in oil markets in the coming weeks, the EU’s next major sanctions could deal a significant blow to both Europe’s energy supplies and global prices.

The EU embargo on “refined petroleum products” from Russia, set to take effect on February 5, 2023, is “most important”, Galimberti said – especially when it comes to one product: diesel fuel.

“Europe depends on Russia for its diesel imports: 60 percent comes from Russia. There is no easy choice,” he said. “Diesel is going to be a potential shortage for Europe in the middle of winter. Diesel is used almost everywhere in Europe from cars to industry and for heating purposes.

Unlike crude, when it comes to refined products, China and India will not up the ante of Russian exports to Europe, Galimberti said, because they have their own refining regions. “They will buy a lot of crude and refine it. That has always been the strategy of China and India. No matter what the price, they refine themselves.

What happens to Russian diesel?

Russia may be able to sell some of its former European exports of refined products to North Africa and Turkey, but not in the same quantities. “It means they will reduce their own crude production,” Galimberti said. “The crude needs to be refined into oil products. If you don’t find a market for oil products, you either consume it yourself or store it. But Russia lacks significant storage capacity, Galimberti said.

“If you take about 1 million barrels per day out of the market, which we think Russia is going to lose as a result of the product export ban, that would be a big deal. That’s about 1 percent of the total market. Not a big deal, but everything in the oil market is based on marginal economics. It takes a small amount of money to tip the balance and have prices go much higher – which is what we expect to happen in February.

IEA has also done Estimate In its monthly oil report for November, it said Russian oil production could fall to 1.4 million barrels per day in 2023 – potentially pushing up global prices. “The extent of uncertainty has never been greater,” the report said.

This article has been updated to add response from Russia and market prices

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