Russian President Vladimir Putin.ALEXEI NIKOLSKY/The Associated Press
The United States and NATO allies struggled to enact sanctions against Russia for the Crimean invasion and annexation and are divided now on additional sanctions for its role in the shoot down of Malaysia Airlines Flight 17. Limited sanctions have apparently been ineffective in moderating Russian behaviour to date, and Europe, struggling with high unemployment and fiscal constraints post-2008, is in a poor position to take a financial hit from sector-wide sanctions such as an arms embargo or risk an abrupt cut-off of Russian gas and oil supplies. Thus, resistance to additional sanctions is coming from the European Union despite the indignities on the victims of Flight 17.
There is a better way. In 2012, Russia exported about five million barrels per day to the EU (out of a total of 7 MMbpd oil exports) for an estimated $290-billion (U.S.), roughly four times the revenues from natural gas. The EU can slash Russian oil purchases immediately by one million barrels per day and buy similar grades of oil elsewhere in a world with considerable spare capacity. Over time, the amount of sanctioned Russian oil can increase as alternative suppliers and infrastructure are developed.
Historically, oil – like gold – has been an interchangeable commodity; as long as the specifications are the same, a barrel of light sweet crude from Saudi Arabia is the same as a barrel from Canada or Russia. Consequently, customer sanctions against exporters have had a limited impact. But that changed somewhat with the success of international sanctions against Iran, which slashed that country's oil revenues by 50 per cent within two years and ultimately forced Iran to the negotiating table.
Russia, however, produces more than twice Iran's output, and it is improbable that China would go along with any sanctions against Russia. Thus, allied sanctions against Russian oil would initially have largely symbolic value, but that would change over time with new infrastructure to diminish Russian oil demand in EU.
The United States can end the four-decade-long ban on oil exports and introduce a large supply of light sweet crude onto the world market to limit supply impacts on EU oil importers. Canada can accelerate the Energy East pipeline project to free up more Middle East and African crude within three years. Japan can restart their nuclear power plants and free up liquified-natural gas capacity to hedge against a Russian cut off of natural gas to the EU. The United States can aid shale-gas development in the EU. Measures like these can limit the cost of sanctions for EU oil-and-gas consumers.
This still leaves the problem of Russian oil being highly interchangeable with oil from other countries. That could change if the world petroleum industry enacted and implemented a system of "micro tagging" every individual batch of oil so that its origin could be tracked.
Historically, once a barrel of oil was mixed in a storage tank, it was very hard to tell where it came from. But with advances in technology over the past decades, it is now possible to do two things: either back trace the hydrocarbons to identify the field it came from or put in a "taggant" that marks the oil to uniquely identify its source when it is first pumped out. Once such a system is in place, it is possible to have far more effective controls on oil from sanctioned or illicit sources. Conflict diamonds are tagged, and we can tag sanctioned oil.
Russia oil under sanction would still find its way to markets, but it would have to be shipped further, using costlier methods of transport like rail, or require the building of new infrastructure such as pipelines to China. More likely than not, it would command less of a premium relative to existing EU customers.
Compared to other sanctions under consideration, sanctions on Russian oil offer the prospect of having little or no negative impact on the EU and its allies. In a Canadian context, making bitumen into higher grade crude oil here through deep upgrading, while enacting genuine methods of reducing greenhouse emissions, would go a great distance to making this process highly palatable to Europeans and to Americans. It is an opportunity not to be wasted.
Danny Lam is a graduate student in civil and environmental engineering at the University of Waterloo. He has had a 25-year career in microelectronics and technology that included stints in industry and academe