One option the United States and other nations have to increase pressure on Russia in response to its invasion of Ukraine is to reduce their Russian energy purchases. British Foreign Secretary Liz Truss has proposed that the G7 countries – the United States, United Kingdom, Canada, France, Germany, Italy and Japan – impose limits on their Russian oil and gas imports. Expert in global energy policy Amy Myers Jaffe explains how this strategy could work and how it could affect international oil markets, which have already been rocked by the conflict.
How important is Russia as a global oil supplier?
Russia produces nearly 11 million barrels of crude oil per day. It uses about half of this production for its own domestic demand, which has likely increased due to rising military fuel requirements, and exports 5 to 6 million barrels per day. Today, Russia is the second largest producer of crude oil in the world, behind the United States and ahead of Saudi Arabia, but sometimes this order changes.
About half of the oil exported by Russia – about 2.5 million barrels per day – is shipped to European countries, including Germany, Italy, the Netherlands, Poland, Finland, Lithuania, Greece, Romania and Bulgaria. Nearly a third of it arrives in Europe via the Druzhba pipeline across Belarus. Those 700,000 barrels a day of pipeline shipments would be an obvious target for some sort of sanctions, either by banning financial payments or denying deliveries through branch lines on the Belarusian border.
In 2019, Europe stopped accepting deliveries for several months from the Druzhba line when crude oil passing through it was contaminated with organic chlorides that could have damaged oil refineries during processing. Russian oil shipments fell significantly because it redirected the flows to avoid the Druzhba line.
The rest of Russian crude oil export shipments to Europe are mainly by ship from various ports.
China is another big buyer, importing 1.6 million barrels a day of Russian crude oil. Half comes from a special direct pipeline, the Eastern Siberia Pacific Ocean Pipeline, which also serves other customers through a port at its end, including Japan and South Korea.
How would Russia be affected if other nations cut imports of its oil?
Sanctions against the Russian oil industry would have a greater impact than limit natural gas flows because Russia’s oil revenues are higher and more critical to its state budget. Russia earned more than US$110 billion in 2021 from oil exportstwice as much as its revenue from natural gas sales abroad.
Since oil is a relatively fungible global commodity, much of Russia’s crude exports to Europe and other participating G-7 nations could end up being sent elsewhere. This would free up other supplies from sources such as Norway and Saudi Arabia to be redirected to Europe.
Russian oil contains a lot of sulfur and other impurities, so refining it requires specialized equipment – it cannot be sold just anywhere. But other Asian buyers can take it, including India and Thailand. And Russia has special supply agreements with countries like Cuba and Venezuela.
It is already clear, however, that Russia is struggling to redirect its crude oil sales. At the start of the invasion of Ukraine, European refiners began to avoid spot shipments for fear of sanctions.
India bought Shipments of Russian crude that were already at sea, at a very favorable price. Markets would likely react to a G-7 oil cap by further discounting Russian crude. We have seen the same pattern in the past when countries have sanctioned Venezuelan and iranian oil: These nations were still finding buyers, but at reduced prices.
Can European nations get oil from other sources?
Oil shipments are arguably easier to reroute than natural gas, which needs to be super cooled to liquefy it for shipping and then converted back to gas in its port of destination. This means that Russian crude oil could potentially be easier to replace and reroute through European countries than its natural gas, which is more dependent on pipeline delivery, depending on market conditions.
To ensure that replacement barrels are available, Europe and the United States could simultaneously increase crude oil sales from their national strategic stocks to soften the blow of any restrictions on Russian crude oil imports to the G-7. The United States already sells 1.3 million barrels per day from its Strategic Petroleum Reserve, and this could increase these flows. China also has released oil from its national strategic stocks to help lower oil prices.
The United States and other G-7 members would also likely ask Middle Eastern countries to relax destination restrictions on their crude oil shipments and pushing countries like China and India to redirect other oils of similar quality to Russian oil to Europe if they increase their purchases from Moscow. Such measures would reduce the risks that G-7 restrictions on Russian oil imports will increase world prices.
Whether China and India would cooperate is uncertain, but it would be in their interest to do so. They are major importers of oil and they would not like to see crude oil prices increase.
How would world oil prices be affected if G-7 countries bought less Russian oil?
That would depend on what other actions governments take in response to the rerouting of Russian oil exports. Nations are already acting to preparing global markets for changes in liquefied natural gas flows in case of reduced purchases in Russia.
G-7 energy diplomacy will likely involve other oil capitals that may be willing to export more oil to ease disruptions in crude oil sales from Russia. Most exporters are maximum in terms of crude oil productionbut some of the largest producers in the Middle East could increase production in the short term to bring an additional 1 million barrels per day or more to market.
US-Saudi relations could be tested. Riyadh has access to large reserves of crude oil in its vast global reservoir system and offshore tankers. In 2014, when Russia invaded Crimea, US allies in the Persian Gulf held more than 70 million barrels in storage near Fujairah in the United Arab Emirates. They did so as a threat to Russia that a price war would ensue if Russian troops moved beyond this peninsula. Russia remained in Crimea, so the oil was not released.[Over 150,000 readers rely on The Conversation’s newsletters to understand the world. Sign up today.]
Saudi Arabia instituted price wars that hurt the Russian economy by 1986, 19982009 and again briefly in 2020. But current oil market conditions make a price war unlikely, given the tight balance between supply and demand. The only scenario that could trigger a price war now would be if global demand were to suddenly contract due to a recession.