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Ukraine-Russia War is going to cost EU a lot for oil and gas: A breakdown

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Akshata Kamath
Akshata KamathMar 09, 2022 | 13:20

Ukraine-Russia War is going to cost EU a lot for oil and gas: A breakdown

The Ukraine-Russia War has led to many social, financial and economic consequences and the implications are long lasting and scary for everyone in the world. The biggest reason why Russia continues to wage this war against Ukraine is because it has the largest military in the world and it continues to be financed. Any guesses about how this military is financed and who pays for it?

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Well, if you stay in the European Union, then it's probably because of you paying your gas bills.

THE BACKGROUND

Russia is a natural resource superpower and is the largest exporter of natural gas and oil, and the second largest exporter of crude oil. Long story short: it has the BIGGEST gas station in the world.

When it comes to Europe, Russia supplies about 40% of the European Union's gas requirements, about 30% of its oil requirements, and even provides a large amount of petrochemicals to Europe through its company Gazprom. It supplies gas through the Ukrainian gas pipelines and other pipelines like Nord Strean 1, Yamal – Europe, TurkStream and Blue Stream pipelines. 

As of November 2021, about an average of 60% of Russia's oil was exported to the OECD European Union, which is an economic organisation with 29 member countries. Meanwhile, 20% went to China, 15% to OECD America (Canada, Chile, Mexico, US) and about 5% to OECD Asia Oceania (Australia, Japan, Korea and New Zealand). 

.Russia controls most of the oil supplies in EU. Illustration: Geetanjali, DailyO
Russia controls most of the oil supplies in EU. Illustration: Geetanjali, DailyO

Of the OECD European Union, the below mentioned 6 countries import most of their oil requirements from Russia: Lithuania (83%), Finland (80%), Slovak Republic (74%), Poland (58%), Estonia (34%), Germany (30%).

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Meanwhile the rest of the EU countries also depend on Russian oil, but not as much. These countries are: Austria, Belgium, Czech Republic, Denmark, France,  Greece, Hungary, Iceland, Ireland, Israel, Italy, Latvia, Luxembourg, The Netherlands, Norway, Portugal, Slovenia, Spain, Sweden, Switzerland, Turkey and United Kingdom.

MOVEMENT IN OIL PRICES  

In the last 14 days since Russia's invasion, the Western countries have imposed a number of sanctions on Russia with the intention to punish bad boy Putin for wreaking havoc on Ukraine and to stop this from going further downhill.

The sanctions, however, had a direct impact on the international oil prices since Russia is one of the top oil exporters, and the risk of a supply shortage started looming over the world. As of February 7, 2022, international crude oil prices (WTI crude) were at $91.32, which rose to $95.72 on February 28.

As on March 8, 2022, crude oil prices in the market opened at a shocking $122.4; which means a jump of 34% in a month. 

Photo: Getty Images
Photo: Getty Images

WHAT WORSENED THE SITUATION?

As we have all seen, the sanctions had no direct impact on Russia's ferocity of attacking Ukraine. In fact, things got worse as Russia attacked Ukraine's nuclear power plant in Zaporizhzhia, and directly risked lives of people in the European Union.

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This has ruffled feathers in the US and EU governments, who have since been forced to consider harsher sanctions on Russia, to stop these attacks.

The US has been mulling over a complete ban on Russian oil by way of sanctioning Russia's oil exports now. If the US went ahead with this, many countries might follow the same, considering their overall dependence on Russian oil reserves. If this happens, this would mean that Russia might have to stop exporting its oil across the world.

And this would pinch Russia a lot. 

Here's why:

As per the BBC, Russia makes about $160 billion per year from its massive oil and gas exports. It uses these funds to fund its military operations and spends about $62 billion per year. If US and other countries sanction Russian oil and gas exports, it would lose most of its international customers, which would eventually pinch Russian revenues. 

However, Germany and The Netherlands shot down US' plan of imposing a ban on Russian oil as the EU has no quick and easy substitutes if the supply is disrupted. 

While the UK and US will not be directly impacted as very less of its oil requirements are supplied by Russia, the rise in global prices will cause inflation, which will affect the world in turn.   

PRICES EXPECTED TO JUMP HIGHER?

Russia reciprocated with a statement saying that it is fully entitled to a 'mirror decision' and place an embargo on gas transit via Nord Stream 1. Nord Stream 1 pipeline presently runs at 100 percent capacity and supplies gas to Germany. Russia also pointed to Germany and US' decision last month to freeze certification of Nord Stream 2, a new gas pipeline connecting Russia and Germany.

Russia also stated that 'foregoing Russian oil will have catastrophic consequences for the world market. The price surge will be unpredictable, up to $300 per barrel, or even more'. It also taunted European politicians to warn its citizens about the indirect impact that this would have on their heating, petrol and electricity costs. 

Photo: Getty Images
Photo: Getty Images

WHO WOULD IT HIT THE MOST? 

The European Union would be the most affected. It has imposed a list of sanctions that stop many companies from transacting with Russia; while its environment that depends on fuel comes from the gas pipes that start from Russia.

Also, the impact of sanctions which led to a rise in fuel prices also hit EU the most, as they continued to pay for their oil imports from Russia. As per a Bruegel report, Russia earned about $350 million per day from oil and $200 million per day from gas from Europe. But on March 3, the number rose to $720 million for gas alone.

SO, WHAT WILL THE EU DO?

The EU's reliance on Russian gas could see import needs cut by almost 80% this year to reduce Putin's leverage, if things go as per plan. 

Ursula Von Der Leyen, the President of the European Commission, mentioned that the EU will double its renewables (to about 45%) to create independence from Russian energy resources. Renewable energy simply provides about 20% of EU's energy requirements and since this cannot change overnight, the plan remains to largely reduce this dependency by 2030. 

Though EU has sufficient oil to get through the winter, the EU is aiming to store tanks for the next year. It also wants to fill up its gas storage over this year and find new sources of gas. The EU is in talks to tap into new supplies and increase energy efficiency this year. It is in talks with countries like Egypt, Qatar, countries in the north rim of the Mediterranean, Australia, and the US regarding boosting their supply in the short term. 

WHY DO OIL AND GAS PRICES NEED TO BE STABLE?  

When crude oil prices go up across the globe, the first primary sector that gets impacted is the Transportation and Logistics sector.

Photo: Getty Images
Photo: Getty Images

All modes of transport, be it land, air or sea, get affected and freight rates rise directly in proportion to rise in fuel prices. This is because companies have to recover their shipping costs. 

When transportation cost increases, this also increases the overall cost of raw material for companies who import their raw materials.   

This is also an opportunity for oil companies to make profits and pay off their debts.

Eg: Say an oil company A (like ONGC) buys 10 barrels of oil for $90/barrel from Russia, Saudi Arabia, etc., and holds it with themselves. When shipping companies (like say Maersk) approach them to buy oil, they can either sell at a higher rate of their choice or at the current rate, or wait for a few days as they know that the oil prices will rise to, say, $120 (which is the rate right now).  

Photo: Getty Images
Photo: Getty Images

Since shipping companies are time-bound and have to deliver large quantities of products on time across multiple countries, they end up buying fuel at whatever price it is available at. They in turn then, pass on these costs to those companies whose products they are shipping across the seas. Eg: If Maersk ships Nike shoes and Dell laptops, amount charged from both Nike and Dell will increase.      

Thus, Dell and Nike will both account for higher product costs, which they will then charge from the end consumers, like you and me. 

So, we might end up paying a much higher amount for products in the coming few months. 

Thus, volatile oil prices cause an overall inflation in the global economy, which is why they need to be stable.

(Or maybe we need to find ways to be less dependent on oil and gas.)  

MEANWHILE, DONALD TRUMP HAS THE LAST LAUGH

A couple of videos of Donald Trump are going viral on Twitter which shows that the former US Prez might be having the last laugh at the moment. Why? Well, he sort of predicted this situation. 

In what seems to be an address to a group of member nations, Trump had addressed how Germany's dependence on Russia's oil would be a disadvantage since Russia could now control it going forward. When Trump said this, the Germans laughed it off. 

In another video, he is seen talking to a German leader at a dining-table meeting, where many other leaders are present. He repeats the issue of being disappointed by Germany, which chose to initiate another agreement with Russia, to help them with their oil needs. 

The situation has caused the inflation rates in US to rise to 7.5% in January 2022, which has also led to a downfall in rankings of Joe Biden, the current President of US.

Guess who is having the last laugh now. 

Last updated: March 09, 2022 | 13:33
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