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Monday, January 30, 2023

Sanctions: Oil embargo and price cap against Russia: What does that mean?

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The EU is putting pressure on. As of today, the oil embargo imposed on Russia after the Ukraine war takes effect. At the same time, an oil price cap will come into force. The consequences are complex, also for Germany.

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A good nine months after the Russian attack on Ukraine, the European Union is getting serious. Starting today, an oil embargo against Russia is to take effect.

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At the same time, the EU and its G7 partners have decided on an oil price cap: They want to tell Russia at what price it can sell its oil on the world market – no more than 60 US dollars (57 euros) per barrel (159 liters). The aim is to dry up the Kremlin’s war chest and stabilize energy prices worldwide.

But aren’t the Europeans cutting themselves in the flesh with that? In Germany, some fear bottlenecks and higher prices at the gas station because of the embargo in the middle of the gas and electricity crisis. Concerns are particularly great at the PCK refinery in Schwedt, Brandenburg, which has been processing Russian oil for decades. An overview.

what is the schedule

Following the start of the EU embargo and the price cap this Monday, two further steps follow: After stopping sea imports, Germany also wants to stop Russian oil deliveries via the Druzhba pipeline (friendship) by the end of the year. This is what Federal Chancellor Olaf Scholz promised in a memorandum at an EU summit at the end of May. From February 5th, there will also be an EU-wide import ban for processed products such as diesel or kerosene from Russia. The next two steps are likely to affect Germany more than the start on Monday.

Does Germany have enough oil even without Russia?

Before the start of the Ukraine war, oil imports from Russia covered around 35 percent of Germany’s needs. Roughly speaking, one third of this came by tanker, two thirds flowed via the Druzhba to the East German refineries in Leuna and Schwedt. According to the Fuels and Energy trade association, crude oil imports from Russia fell to 16 percent by October 2022. Replacements come from the UK, USA and Kazakhstan. The industry association assumes that the Russian tanker oil affected by the EU embargo will be completely replaced in good time.

What is the price cap for Russian oil?

Here, too, the goal is to squeeze Russian income from the oil business. Russia should certainly continue to sell oil to third countries – otherwise the valuable resource would become even scarcer on the world market – but at a low price dictated by the West. The project was largely driven by the Americans, who feared that the European ban on imports could drive up prices for non-Russian oil and, by extension, gasoline. Now there is hope that the upper price limit will lead to relaxation on the energy markets.

How is this supposed to work?

The EU leverages transport and the services required for it. According to Brussels officials, European shipping companies operate more than half of all tankers in the world. The principle is: Shipments of Russian oil to third countries are prohibited – unless the price of the cargo is not higher than the cap. In other words, if the price limit is adhered to, Western shipping companies can continue to bring Russian oil to India, China or other countries with their ships. The same regulation should apply to services such as insurance, technical assistance, financing and brokerage services. The G7 countries and Australia support the oil price cap.

Will the bill add up?

That cannot be said with certainty. The cap now set at $60 a barrel is below the recent market price of $69 for Russian oil. According to Estonian Prime Minister Kaja Kallas, every dollar less per barrel could cut Russia’s oil revenues by $2 billion a year.

Russia says it will not ship oil to countries that accept the price cap. If Moscow held out, it could lead to a shortage and thus rising prices. “The EU is endangering its own energy security,” said Russian foreign politician Leonid Slutsky, according to the TASS state agency.

But the limit has now been set so close to the market price that exports are still worthwhile for Russia. The Western calculus: The Kremlin will not be able to do without the income from exports to third countries. The behavior of China, India and Egypt, for example, which are currently buying a lot of Russian oil, will be important.

Will heating oil and diesel become cheaper with the cap?

That, too, depends on the reaction of Russia and world markets. Basically, the heating oil price and the international price for crude oil are developing in the same direction, albeit with a slight time lag. However, other factors also have an impact, such as the economy, demand, taxes and levies, as well as transport and storage costs. ADAC fuel market expert Christian Laberer says about the price of fuel: “Ultimately, it depends on whether the cap pushes down oil prices or, on the contrary, causes them to rise.”

And what will be the effects of the oil embargo?

Critics warn that consumers will feel the German waiver of Russian pipeline oil at the pump from January 1st, especially in East Germany. The background is the special location in the PCK refinery in Schwedt, Brandenburg. The plant with 1200 employees has been processing Russian oil from the Druzhba for decades and supplies large parts of Mecklenburg-Western Pomerania, Brandenburg and the capital Berlin, including the BER airport. And it is still not clear where the oil will come from to fully utilize the PCK in the future. This is also due to the fact that the majority owners – two subsidiaries of the Russian state-owned company Rosneft – have long shown no interest in turning away from Russian oil. They have been under federal trustee control since mid-September. The government is trying very hard to find alternative sources of oil for Schwedt.

What are the options for the PCK?

Up to 55 percent of the demand in the PCK is to be brought to Rostock by tanker and from there to Schwedt via an existing pipeline. Management is currently unable to do more. The federal government is therefore pursuing two other options: Kazakh oil could be delivered via the Druzhba. And additional tanker oil could come via the Polish port of Gdansk. The East German refinery in Leuna will also be supplied via this in the future. Its French owner Total had already decided in the spring not to buy any more Russian oil from the end of the year and, according to the latest information, intends to do so.

Poland had long had reservations about the PCK because of the Rosneft stake. After tough negotiations, Economics Minister Robert Habeck (Greens) announced a breakthrough on Thursday: Poland basically agreed that Schwedt could also get oil via Gdansk in the future. However, the crowd remained open. Habeck’s State Secretary Michael Kellner is therefore traveling to Poland this Monday for “in-depth talks”.

Source: Stern

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