What does the US ban on Russian oil and gas really mean?

10 Mar 2022 , 12:32 PM

On the night of March 08, the world panicked in reaction to the US banning oil from Russia coming into the United States. However, over the next couple of days, not only did the price of oil fall sharply but even the equity indices across the world rallied. The world was gradually veering around to the view that the US ban on Russian oil may not matter after all. We will come back to this point later.

CHART 1 – HOW BRENT CRUDE MOVED OVER LAST 1 YEAR ($/BBL)

If you look at the Brent price chart, the rally began around the start of December 2021. At that point, Brent was around $69/bbl. Between the start of December and 08th March, when the Russia oil ban was announced, the price of Brent Crude rallied from $69/bbl to a $130/bbl, an 88% rally in just 3 months.

The spike in oil was an outcome of the worsening geopolitical situation in the Caucuses and the eventual full-fledged war between Russia and Ukraine. In response to this aggression, the US, UK, EU and other G7 nations decided to impose sanctions on Russia. Apart from the financial sanctions and embargoes, a major punitive action was the ban on Russian oil.

What is the nature of the US oil ban on Russia?

On 08th March, the US government announced that it was banning all Russian oil and oil products on US soil effective immediately. Canada has also joined in the ban. Japan plans to support the US and UK will phase out Russian oil imports by end of 2022. Russia ships 7-8 million bpd of crude, of which over 85% goes to Europe and China. The share of UK and Canada in Russian oil is insignificant. The US and Japan, together, account for about 3.4% of Russian oil exports.

While Biden’s ban on Russian oil took effect immediately, it gave 45 days’ time for buyers to wind down their existing contracts. In addition, citizens of the US cannot buy Russian oil even in the open market nor can they trade in Russian oil futures. The order also bans new US investment in Russian energy sector and bars Americans from participating in any foreign investments flowing into Russian energy. For the US, it would be much easier to get the support of countries like UK, Japan, Australia and Canada. But, EU support will hold the key.

Meanwhile the US has domestic problems of its own. US retail inflation had touched 7.5% in Jan-22 and is expected to scale 7.9% in Feb-22, the highest in more than 40 years. At the same time, the price of gasoline in the US has touched an all-time record of $4.173/gallon. The Russian ban will make gasoline pricier, so it may not be too popular in the long run.

Here is why EU participation is key to the Russian oil ban

We had stated earlier that the EU participation in the Russia oil ban is essential to be meaningful. Check the table below to understand why.

Country	Russia Oil Exports (Mn tonnes) 2020	Russian Export Share	Russia Gas Exports (BCM) 2020	Share of Russian Exports (%)	Russian Export Share
Russia output	524 MT		Russia Output	638 MT
Russia output	260 MT	100%	Russia Exports	234 MT	100%
Canada	0.8 MT	0.3%	Canada	0.0 bcm	0.0%
The US	3.7 MT	1.4%	The US	0.0 bcm	0.0%
Europe	138.2 MT	53.2%	Europe	184.9 bcm	78.9%
CIS	14.8 MT	5.7%	CIS	26.1 bcm	11.1%
Japan	5.1 MT	2.0%	Japan	8.4 bcm	3.6%
China	83.4 MT	32.1%	China	6.9 bcm	2.9%
India	2.6 MT	1.0%	India	0.7 bcm	0.3%

Data Source: International Energy Agency (IEA)

A quick look at the above table brings out why the EU holds the key.

• Between Europe and China, they account for 85.3% of the total crude oil exports of Russia. China has already underlined that they will stand by Russia and that was also evident in their voting pattern at the UNSC, UNGA and UNHRC. The only ambivalent bloc right now is the EU and their participation in the ban holds the key.
• The influence of the EU spans oil and gas. Out of the total gas exports of Russia for 2020, EU and the CIS nations absorbed 90% of all gas exports out of Russia. In short the EU relies on Russia for nearly one-third of its energy needs. Breaking this reciprocal relationship will not be easy, but the oil ban would work only if EU joins in.
• For now only the US, UK and Canada are participating and Japan has agreed to support the US in principle. US share of Russian crude oil exports has already fallen to 1.4% in 2020, while Japan’s share is also down to 2%. Even if Japan joins in the ban, the surplus of about 8 million tonnes of crude would be easily absorbed by India and China.
• The only way the Russian oil ban can be successful, is if the EU participates. Of course, the EU will need guarantees on energy security, both in terms of assured supply of crude oil and gas, in the absence of Russian flows. That will not be easy.

Will the ban on Russian oil really impact India?

India, on its own, has a very small exposure to Russian oil. It accounts for just about 1% of Russian oil exports, largely because Middle East oil is cheaper logistically. However, the real worry for India would be on the crude price front. At $120-130/bbl, the price of oil is already posing a challenge. That is why, India could have problems if the EU participates, even partially, in the Russian oil ban.

Goldman Sachs has warned of oil at $160/bbl if the Russia oil ban exacerbates. Russian oil minister has warned that if the EU participates in the ban, then crude could spike to $300/bbl. The truth is obviously between the extremes, but even at $160 it is a tough scenario for India. Petrol and diesel price hikes are long overdue and they will give a leg-up to inflation. It would be in India’s interest that EU does not participate and the Russia-Ukraine war sees an early conclusion.