Editors’ note: This article touches on politics and policy. Please note that MarketMinder favours no party nor any politician. We assess policy solely in terms of how it may (or may not) affect markets and the economy.
Ever since Russian sabre-rattling started late last year, we have seen discussions in financial commentary we follow over what a potential invasion meant for global oil supply. After Western policymakers’ initial sanctions carved out Russian energy, they had the sector in their crosshairs Tuesday. UK Prime Minister Boris Johnson’s government announced it would ban imports of Russian oil petroleum products, effective at yearend. In conjunction with his move, US President Joe Biden signed an executive order that immediately bans the US from new contracts to import, “Russian crude oil and certain petroleum products, liquefied natural gas, and coal.”[i]
This, in our view, stoked a jump in oil prices, fuelling projections of higher still ahead amongst commentators we follow, causing damage to stocks and the economy.[ii] However, it seems to us the US and UK bans are mostly symbolic. The EU-Russia energy relationship runs far deeper, and we think it is worth watching. The EU also announced a new energy plan to reduce reliance on Russia over time. However, we don’t think anything announced in it fundamentally alters EU-Russia energy trade for the foreseeable future. Let us explain.
The UK’s ban on Russian oil doesn’t take effect immediately, permitting Russian oil and gas to flow into the country through yearend. As UK Business Secretary Kwasi Kwarteng put it, “This transition will give the market, businesses and supply chains more than enough time to replace Russian imports.”[iii] So it is a ban that bans in roughly nine months. The Biden administration’s ban immediately bars firms from entering into new contracts involving Russian oil. The move establishes a 45-day grace period for deliveries of previous purchases to reach US ports.[iv]
Russian oil amounts to about 8% of US oil imports.[v] However, overall US oil imports are way, way down in recent years, so we think it is perhaps more helpful to look at Russian imports’ share of US total oil consumption.[vi] America imported 672,000 barrels per day of Russian oil and oil products in 2021.[vii] US 2021 oil consumption was 19.78 million barrels per day, suggesting Russia accounts for just 3.4% of all oil products consumed in the country.[viii] That is small. The same holds for the UK. As Kwarteng noted on Twitter, ever the source of major policy proclamations, UK imports of Russian oil amount to 8% of demand.[ix] Russian natural gas supplies just 4% of UK needs.[x] Now, oil types vary in factors like sulfur content, and that can create difficulties in refining oil, as refineries are often equipped to handle the certain type of oil they usually import. But, to us, the scale here makes those issues look like tiny for the US and UK at present.
We think the EU, though, would likely face far larger issues if it banned Russian energy, which amounts to more than 40% of EU gas imports and 27% of oil.[xi] That, in our view, is very likely why they didn’t ban Russian oil. Instead, EU leaders announced they would:
If they can achieve these points, we think it could sever EU reliance on Russia. But in many ways, this seems aspirational, with aspects amounting to plans to make plans. The EU doesn’t have new trade partners in gas or oil, and the second two points hinge on plans that aren’t set. Furthermore, whatever you think of renewable energy, there are issues here that may be harder to surmount than this plan envisions, in our view.
Renewables are intermittent sources of power: Solar and wind, the two chief forms, don’t generate much power when the sun isn’t shining and the wind isn’t blowing. Because storage options are lacking presently, that is a problem, in our view. It is partly why power prices spiked in Europe last year, before Russia began rattling its sabre—a lack of wind made Europe turn more and more to gas and coal.[xiii] If this plan leads utilities to mothball more natural gas or coal power stations and ramp up renewables in an effort to cut ties with Russian President Vladimir Putin, intermittency issues could compound. Moreover, we are a bit sceptical renewable sources come on line fast enough to have much bearing on the geopolitical and energy issues in Europe now.
The EU’s vulnerability to Russian energy likely underpins much of the big oil swings we have seen this week, in our view.[xiv] When the US and UK unveiled bans on Russian oil, we suspect many market participants immediately extrapolated them forward, wondering what about Europe?
Still, it is worth remembering that as we type this on 10 March, Russian energy shipments to the EU are mostly flowing fine, especially gas. Of course, that could change—a factor worth watching. The EU’s gradual approach may not be optimal in the eyes of many because it doesn’t seem likely to hit Putin hard in the here and now. We think the silver lining, though, is that the gradual approach should help uncertainty fade with time. That should help oil prices cool, which we think would be welcome news to many.
[i] “FACT SHEET: United States Bans Imports of Russian Oil, Liquefied Natural Gas, and Coal,” Staff, The White House, 8/3/2022.
[ii] Source: FactSet, as of 10/3/2022. Statement based on Brent crude oil prices rise, 4/3/2022 – 10/3/2022.
[iii] “UK to Phase Out Import of Russian Oil By End of 2022 in Further Invasion Sanction,” Political Staff, The Independent, 3/8/2022.
[iv] “Background Press Call by a Senior Administration Official on Announcement of US Ban on Imports of Russian Oil, Liquefied Natural Gas, and Coal,” Staff, The White House, 8/3/2022.
[v] Source: US Energy Information Administration, as of 10/3/2022.
[viii] “How Much Oil Is Consumed in the United States?” Staff, US Energy Information Administration, page updated 9/3/2022.
[ix] Source: Twitter, @KwasiKwarteng, 8/3/2022.
[xi] Source: Eurostat, as of 9/3/2022. Fuel import figures as of 2019 to avoid pandemic skew.
[xii] “REPowerEU: Joint European Action for More Affordable, Secure and Sustainable Energy” European Commission, 8/3/2022.
[xiii] Source: WindEurope, as of 10/3/2022.
[xiv] See note ii.
Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.
This article reflects the opinions, viewpoints and commentary of Fisher Investments MarketMinder editorial staff, which is subject to change at any time without notice. Market Information is provided for illustrative and informational purposes only. Nothing in this article constitutes investment advice or any recommendation to buy or sell any particular security or that a particular transaction or investment strategy is suitable for any specific person.
Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.