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May 6, 2022
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The sixth package of EU sanctions – the turn came to oil

We must do everything possible so that the currency from Russia’s energy exports does not go away, like water into sand

Not even two and a half months have passed since the beginning of the sanctions war, and the West is already preparing the sixth package of sanctions against Russia. On May 5, this new tranche of anti-Russian sanctions was announced by the head of the European Commission Ursula von der Leyen. There are three main points in the new package. First, the ban on broadcasting three Russian channels to Europe. Secondly, the disconnection of Sberbank and two other large Russian banks from the international banking alert system FAST. Thirdly, embargo on all deliveries of Russian oil to Europe.

The third point is the most important. “Today we will propose a ban on all Russian oil in Europe. This will be a complete ban on the import of oil from the Russian Federation, delivered by sea and pipelines, crude and refined oil“, – said the head of the EC.

It is planned that the EU will completely withdraw from the purchase of Russian crude oil within six months, and from oil products within a year. Behind the scenes of preparations, discord began again. The main critic of the swift imposition of the embargo is again Hungary, which is splitting Europe’s unity over gas sanctions. Hungary was joined by Slovakia, followed by the Czech Republic and Bulgaria. They all requested at least a 20-month grace period for themselves. Because of this, the official introduction of the sixth package is somewhat delayed, but in any case, it will be launched before mid-May.

Europe’s dependence on Russian oil is somewhat less than on Russian gas (with the help of our gas, until recently, 40% of the EU’s needs were covered), but still very impressive. Russia delivers to Europe daily 4-5 million barrels of crude oil and oil products, which is about 25% of the total EU imports of these resources.

To reduce dependence on Russia by at least half, the EU needs to find 2-2.5 million barrels of free crude oil and/or oil products on the market. To date, the United States occupies the first place in the world in the extraction of black gold. At the end of 2021, daily production there was about 16.5 million barrels. The United States is followed (million barrels): Saudi Arabia – 11.0; Russia – 10.7; Canada – 5.2; Iraq – 4.1; China – 3.9; UAE – 3.7; Iran – 3.1; Brazil – 3.0; Kuwait – 2.7 Brussels pins its hopes on Washington, but the US cannot give 2-2.5 million barrels per day. In the list of exporters of black gold, America occupies a modest eighth place (the leaders are Saudi Arabia and the Russian Federation). The entire American export of oil is just the mentioned 2-2.5 million bar. per day, and it is already scheduled under contracts.

Brussels has no choice but to turn to the OPEC+ states, where the leading positions are occupied by Saudi Arabia (the original core of OPEC) and Russia (which joined OPEC in 2016). And the countries of the oil cartel (OPEC+) seem to have already felt all the advantages of the cartel agreement, when it is possible to increase revenue from the export of black gold not by increasing the physical volumes of goods, but by raising prices. OPEC+ is quite happy with the recent price of about $100 per barrel (it is now even higher than this level) and does not want to make any sudden moves. In April, the cartel planned to increase production by 432 thousand barrels per day, with a quarter of the April quota being Russian. But now the world is witnessing a fading of economic growth, we must take into account the lockdowns in China. So at its meeting in May, OPEC + may reduce the pace of increasing oil production or even freeze its growth.

These OPEC+ plans run counter to EU plans to replace Russian oil with supplies from other member countries of the oil cartel. The impossibility of compensating Europe for oil supplies from Russia has already been announced by Saudi Arabia, Iraq and Kuwait. The commercial considerations of these and other Arab OPEC members are mixed with political considerations. In the Russian list of “unfriendly countries” (38 persons involved), there is not a single state included in OPEC+.

And if we talk about the commercial interest of the OPEC + member countries, then, probably, Brussels’ oil sanctions against Russia will further warm up prices on the black gold market. Experts do not rule out that the resulting imbalance between supply and demand will lead to an increase in prices up to $150 per barrel. For Europe, such prices can be deadly. It is even hard to imagine what retail prices for gasoline might become. And we must keep in mind that the introduction of an oil embargo against Russia could be the last energy blow to the European economy. The first blows were dealt by decisions to limit the import of coal and natural gas. Coal prices in Europe have already exceeded $300 per ton. Natural gas prices are not going to fall below $1,000 per thousand cubic meters (last year they were in the range of $300-500). And now – the prospect of having oil at a price of $150 per barrel (twice as expensive as at the end of 2021, and three times as expensive as at the end of 2020). A terrible energy crisis is brewing. Already in the first quarter of this year, GDP growth in the euro area (19 states) was purely symbolic – only 0.2%. In the second quarter, the dynamics of GDP may go negative.

Of course, the oil embargo of the sixth package of sanctions will be very painful for Russia as well. Gas and coal contribute to the Russian budget less than 10% of all revenues. And the production and export of oil – more than 30% of budget revenues. We will feel the EU oil embargo (regardless of whether it is full or partial) after November (when the six months allotted for curtailing oil imports from Russia expire).

In part, Russia will be able to reorient the supply of black gold to the East. Both China and India are ready to import additional quantities of Russian oil, especially since they will be supplied with good price discounts. May 4th New York once reported on how Russia’s eastern partners are intercepting oil that Europe refuses. In less than a week, 9 tankers unloaded in four ports on the west coast of India, which delivered oil and LNG from Russian companies to the country. They were abandoned in Europe, but taken at a discount in India.

NOW comments: “For India, the decision to stick firmly to its neutrality with regard to Russia’s war in Ukraine no longer means simply maintaining options in a world with multiple centers of power. It has become a lucrative example of economic opportunism: Russian oil is too good a deal to pass up. India’s purchases of Russian oil have skyrocketed since the start of the conflict, rising from zero in December and January to around 300,000 b/d in March and 700,000 b/d in April. Oil now accounts for nearly 17 percent of India’s imports compared to less than 1 percent before the invasion.”

And Russia should reorient most of the black gold mined in the country to itself. Let’s be frank: the supply of crude oil to the world market is barbarism. More D.I. Mendeleev said: “Burning oil is like heating the stove with banknotes.”

And in Russia, we ourselves have been burning oil for many years, and we supply it abroad for others to burn. In addition to the production of gasoline and other fuel oil products, we need to develop petrochemistry, the production of plastics and polymeric materials. The range of petrochemicals is very wide: ethylene, propylene, butylenes; alcohols, including higher fatty alcohols (HFA); carboxylic acids, including synthetic fatty acids (FFA); ketones: acetone, methyl ethyl ketone (MEK); all kinds of broadcasts; benzene: toluene, ethylbenzene, styrene, cumene; phenols, nitrobenzenes; halogen derivatives of hydrocarbons, synthetic rubber, latexes; tires, rubber products (RTI); carbon black, etc. I am not talking about the range of plastics and polymeric materials produced on the basis of oil, it is so wide.

By developing deep oil refining, we will primarily solve the problem of import substitution, which has risen to its full potential in connection with the sanctions war. Surpluses of petrochemical products, production of plastics and polymeric materials can be directed to the external market. The efficiency of such exports will be an order of magnitude higher than the export of crude oil. In addition, products of deep oil refining fall under the scope of Western sanctions to a lesser extent.

Unfortunately, now domestic oil refining is almost exclusively reduced to the production of gasoline and other fuels.

It is necessary to urgently develop a program for the development of deep processing of domestic oil. Under it, serious import purchases of machinery and equipment will be required. There is currency for these purposes (yet). Here are the EU data on the amounts of currency that the EU countries paid to Russia for the supplied energy resources from February 24 to May 5, 2022 (million euros):

oil – 20 986,

natural gas – 30.811,

coal – 884.

In total, for three types of energy resources, Russia received 52.581 million euros from the EU in a little over two months. It is necessary to do everything possible so that this currency does not disappear like water into the sand, but is directed exclusively for the purpose of Russia’s re-industrialization, including the development of production for deep oil refining.

Photo: REUTERS/Dado Ruvic

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