Oil is back
TLDR: Can the EU move away from Russian oil?
Long term: Yes
Short-Mid term: No
In 2017, Economist popularised the phrase “Data is the new Oil” after 5 years Oil is taking it back. Sanctions after the Russian invasion have rendered Russian oil untouchable for the majority of nations however EU continues to buy it every day.
The markets are in turmoil - the price of oil is skyrocketing endangering the bounce-back of the economy after the two-year-long pandemic. EU is facing a stagflation scenario where we have no growth of the economy but high inflation - this is the kind of stuff that gives Policymakers and Economists nightmares. The question everyone is asking can the EU move away from Russian oil?
The question is: How do you replace 4.8 million barrels of oil?
Let’s try to answer the question
A: Who are the biggest Oil exporters and Producing nations?
Oil exporters in 2020
And now the daily Barrel production ( pay attention to Orange color - US and Russia)
The US is one of the biggest producers but also the consumer of Oil this is why it doesn’t appear high on the exporter’s list. And this is why just can’t fill up the Russian gap for the EU.
And now let’s look at where Russia is sending this oil?
By this, we can infer the most effort and pain of sanctioning Russian oil will be felt by the EU and NOT US or China. The US is the most self-reliant in terms of energy needs and China, the biggest importer from Russia, continues to buy at discounted rates from Russia.
B: Who can possibly substitute the Russian Oil?
Looking at the data, you can easily say Venezuela and Saudi Arabia can increase production since they have the highest reserves. However, it’s not straightforward. Let’s look at some of these options
Saudi Arabia
Saudi is part of OPEC which basically is a non-political Oil mafia organization that sets its members’ production limits every year. OPEC so far has declined the US request to raise production which could help the EU to import oil from other OPEC nations. Prince Salman has a bone to pick with the US after he was made an international pariah for the killing of a journalist Kishoji. And is playing hard to get. This is exacerbated by the fact that Joe Biden's strategy was to de-prioritize Saudi Arabia during his presidency. Currently, Saudi and UAE are not returning US calls even.
The leaders of Saudi Arabia and the United Arab Emirates have been declining calls from US President Joe Biden for several weeks, The Wall Street Journal reported on Wednesday, citing officials in the Middle East and the United States.
The messages of dissatisfaction sent by Saudi crown prince Mohammed bin Salman (MBS) and Emirati Shiekh Mohammed bin Zayed al Nahyan come as the two leaders share concerns over the American response to recent missile and drone strikes from Yemen, claimed by the Iranian-backed Houthi rebels.
The two nations are also reportedly disappointed with the state of negotiations in the ever-nearing Iran nuclear deal, according to the WSJ. - source
There is a lot to unpack here. Let me simplify
Saudi brazenly killed its journalist Khashoggi
The US outcasted Price Salman as he was directly linked to orders of killings
Biden comes to power and de-prioritize Saudi ties
Saudi and UAE hate Iran and Qatar
Iran hates them back and supports Yemen rebels - they have been in war since 2015. More on the Yemen war here
Now that the US is opening up to Iran again to get more oil on market ( Iran has sanctions against it selling oil in the open market), it angers Saudi and UAE.
The Yemen war is devastating, here is one piece of information to give you perspective.
The UN estimates the war had killed 377,000 people as of the end of 2021, both directly and indirectly through hunger and disease – 70 percent of those deaths are children.
This is the tip of the iceberg, I can write a 100-page paper on the complex geopolitics in the Gulf.
And It might well be the case the US and West will have to overlook a lot of ethical and moral issues to appease Prince Salman and to get them to agree on increasing production or tolerate Iranian oil coming back to the market.
In the end: What’s the price of ethics, morality, and women's rights in the Gulf over the war in Ukraine?
It is definitely tricky and the US and EU leaders have been trying to travel to Gulf to repair relations.
Venezuela
Has the highest reserves of oil but no money. Dictatorship has destroyed the economy and Maduro continues to run the country to the ground. Quite simply put Venezuela doesn’t have the infrastructure to scale its oil production capabilities.
“Venezuela can’t contribute much, its oil industry is destroyed,’’ José Toro Hardy, a prominent Venezuelan economist told Forbes. By Toro Hardy’s figuring, it would take about $250 billion of investment and seven to eight years to bring Venezuela's production back to its former levels–it stood at 3.5 million barrels a day (bpd) in 1998. “Major foreign investment is needed, and it can’t reach the country if the country can’t commit to restoring democracy,’’ he added. - Source
Iran
Iran is a legitimate candidate to ease some of the supply problems and also a candidate for easy transportation of oil. And the US started talks of bringing them out of sanctions and everything was going fine until they fired missiles at the US embassy in Iraq! Two years of talks were destroyed in one day. #FacePalm. And now it’s back to square one!
With the three biggest oil producers out of the picture. It looks difficult to cut the Russian oil in the short term or even mid-term.
Kazakhstan - Kazakhstan is aligned with Russia so that option is also out. Putin recently helped the President to quell a rebellion so I guess the President of Kazak owes him some favors now.
Bottom line: Unless Iranian oil comes back to the market or Saudi and UAE increase production, replacing Russian oil is an extremely difficult task.
EU however is making some deals in Gas supplies to ease the pain on gas if not oil. The two prominent deals are
Azerbaijan - A new deal should help the EU to cut some dependency on Russian gas. Azerbaijan is also trying to reclaim its territory from Russia-backed Armenian troops. As they say, the Enemy of your enemy is your friend.
Qatar - Germany has signed a new LNG deal with Qatar. It’s a long-term deal and will help in the long term but not in the short or mid-term.
US - EU is jointly buying LNG from the US now. Fracking gas once an outcast for environmental damage is now going to be the savior of EU from Russian gas.
In other news demand for Russian oil drops
Surprise surprise
Russian oil exports fell last week, with average shipments of around 3.63 million barrels per day (bpd) between March 17 and 23, down by 26.4 percent compared to the previous week, Bloomberg reported on Monday, citing industry data it had seen.
That means that the oil depots and pipelines will soon be near capacity …
Russia's Transneft, operator of the world's largest oil pipeline network, has set caps on oil received by it as storage filled up amid weak demand for Russian fuel, hit by Western sanctions, five sources familiar with the matter said on Tuesday.
Transneft has told several Russian oil firms it would limit intake to its system amid high volumes of stored oil, which affect flexibility and threaten normal operations, said the sources, who spoke on condition of anonymity.
and that means that Russia will soon have to reduce production
Russia will have to shut in some of its oil production as it will not be able to sell all the volumes displaced from European markets to other regions, with Russian crude production falling and staying depressed for at least the next three years, Standard Chartered said earlier this month.
and that means that Russian unit cost per barrel will increase and thereby hurting profits even more.
Moreover - Outages
There seems to be a major pipeline outage. 1 million barrels per day is massive.
The Caspian Pipeline Consortium, a system that carries oil from West Kazakhstan and Russian oil producers to the Black Sea, said in a statement Tuesday that an inspection revealed damage to a marine terminal. The group said some operations are being temporarily suspended to make repairs.
A Russian energy official, quoted by Russian state news agency TASS, said Tuesday that the repair of the marine terminal near the Black Sea port of Novorossiysk could take six weeks to two months and may shrink oil exports by about 1 million barrels per day.
"This is a rather serious timeframe," Pavel Sorokin, Russia's deputy energy minister, was quoted as saying by TASS. He added that a heavy storm damaged at least one of the three oil loading facilities and assessments are ongoing.
Some people might say that Russia can sell more oil to the rest. Can it?
Finding a new home for Russian-EU oil
Russia could theoretically sell more oil but there are not many options left as you can see above in the top oil consumer list. Two main options are China and India.
Let’s look at India first.
India
India which imports 80% of its oil might be another legitimate contender but India's Petroleum minister recently ruled it out.
First, you need to understand that India does buy oil from Russia but in small quantities (relatively). India companies have quadrupled their buying to 360k barrels per day which is less than 10% of the 4.8 million barrels per day Russia needs to find buyers for.
Indian companies are snapping up Russian oil through spot tenders taking advantage of deep discounts
If India wants to buy more or scale its above 1M barrels per day, it needs to sort out a lot of challenges such as payments (Russia was open to Rupee), transport, and insurance. All of which are big challenges. And a recent announcement from the Indian govt vetoed the idea…
India is not considering buying oil from Russia or any other country using Indian rupees, the junior oil minister told parliament on Monday, after Western nations imposed sanctions on Russia over its invasion of Ukraine.
With Western sanctions hitting Russia's dollar-based trading, there is focus on Moscow's efforts to switch to other currencies, including the possible use of the yuan and rupee in deals with China and India.
Without the Rubble Rupee trading mechanism, India will not become a big buyer but Indian companies will continue to buy highly discounted small amounts on the spot markets.
China
China is a big buyer of Russian oil BUT it might not be able to buy up all the sanctioned oil.
Take a look a China’s oil imports. Russia is nicely balanced at 15%. Now, would China increase this share? Currently, volumes are 1.6M barrels per day to double the volumes mean getting an additional 1.6M but for that a. China needs to reduce import elsewhere ( since supply is constant) and b. making Russia oil the majority share of oil imports.
Looking at the German mistakes recently, I doubt the Chinese will scale Russian oil imports.
Of Rouge missiles and Nations
There is a lot of military activity going on. It’s almost surreal how many rouge missiles and military actions that happened recently, I hope it calms down soon.
Russian military drills at disputed Japan islands
India accidentally ( yes, for real) fired a missile at Pakistan
Iran fired a missile at the American embassy in Iraq
Israel fired missiles at Syria
North Korea - testing banned cruise missile
South Korea responding but putting ALL its F-35 on the runway
Azerbaijan entering the disputed territory with Armia infuriated the Russians
In the end, I want to share something light-hearted and outright funny. North Korea released a video of Kim and missile testing - I kid you not this is real
South Korea - Elephant Walk
That’s all folks.