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Last Friday, we discussed draft legislation circulating in Washington that would ban US imports of Russian oil products, noting that it had some bipartisan support and could pass. Tuesday, President Joe Biden rendered that aspect of our coverage rather irrelevant, issuing an executive order that bans the US from importing, “Russian crude oil and certain petroleum products, liquefied natural gas, and coal.”[i] UK Prime Minister Boris Johnson unveiled a relatively similar action the same day. The EU? Well, it issued a plan—not a ban. That last point is crucial, in our view. While the US and UK bans are mostly symbolic, the EU-Russia energy relationship runs deep. In our view, speculation over it likely explains much of oil prices’ volatility lately, making developments there worth watching. However, it is worth noting that nothing announced to date fundamentally alters EU-Russia energy trade.
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.[ii] The UK ban is a bit different. It 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.
As we noted last week, Russian oil amounts to about 8% of US oil imports. However, overall oil imports are way, way down in recent years, so it is perhaps better to look at Russian imports’ share of US total oil consumption. America imported 672,000 barrels per day of Russian oil and oil products in 2021.[iv] 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.[v] 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.[vi] Russian natural gas supplies just 4% of UK needs. Of course, oil types vary in factors like sulfur content, and that can create difficulties for refined products. But, to us, that looks like a tiny speedbump for the US and UK at present.
The EU, though, would face far larger issues if it banned Russian energy, which amounts to more than 40% of EU gas imports and 27% of oil.[vii] 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, it could sever EU reliance on Russia. But in many ways, this is 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.
Renewables are intermittent sources of power: Solar and wind 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. 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. If this plan leads utilities to mothball more natural gas or coal power stations and ramp up renewables in an effort cut ties with Russian President Vladimir Putin, intermittency issues could compound. Moreover, we are a bit skeptical 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. When the US and UK unveiled bans on Russian oil, we suspect many market participants immediately extrapolated them forward, wondering what about Europe? That uncertainty likely underpins much of the volatility in oil since.
Still, it is worth remembering that as we type this on March 10, 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. The silver lining, though, is that the gradual approach should help uncertainty fade with time. That should help oil prices cool, which we suspect 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, 3/8/2022.
[ii] “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, 3/8/2022.
[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] Source: US Energy Information Administration, as of 3/10/2022.
[v] “How Much Oil Is Consumed in the United States?” Staff, US Energy Information Administration, page updated 3/9/2022.
[vi] Source: Twitter, @KwasiKwarteng, 3/8/2022.
[vii] Source: Eurostat, as of 3/9/2022. Fuel import figures as of 2019 to avoid pandemic skew.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.