Banning Russian oil exports might hurt Europe far more than the U.S. or Russia - and Vladimir Putin knows that

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Just under two years ago, when the global economy was pretty much shut down in the panicky first wave of the COVID-19 pandemic, oil prices actually went below zero. On Monday, they shot north of US$130 a barrel in early trading and almost hit US$140 at one point, before falling back a bit.

Natural gas prices rallied by 30 per cent, reaching an all-time high. According to Bloomberg, the benchmark Dutch wholesale price reached US$470 a barrel oil equivalent. That is not a typo.

The latest price driver?

Over the weekend, U.S. Secretary of State Antony Blinken, who was on a whirlwind tour of NATO countries in Eastern Europe, told the media that the White House was in “very active discussions” with European allies about banning Russian oil exports to the United States and Europe. An oil export ban has bipartisan support in the U.S. Congress.

His admission put the energy markets into near panic. While many energy strategists and analysts suspected soaring prices were inevitable as the war in Ukraine entered an ugly phase dominated by the bombardment of cities, others thought prices would not explode because Western governments would be forever reluctant to ban a crucial source of energy: Russia is the world’s third-largest energy producer, and exports far more than it consumes itself.

You can’t blame the doubters. As recently as last Thursday, the White House was playing down the likelihood of slapping an oil export ban on Russia. And Europe, which has few domestic reserves of oil and natural gas, was resisting a ban, and still is. Russian energy exports had been exempt from sanctions – but for how much longer?

In recent days, the moral argument to ban exports of Russian oil, and possibly gas, began to displace the economic argument to keep those exports untouched to protect families and businesses in Europe and beyond from a price shock. That position became increasingly untenable because energy exports are financing Russia’s war in Ukraine, to the point of cringing moral absurdity: As energy prices rose, Russia earned more export revenue to pay for its destruction of Ukraine.

Ukraine’s Foreign Minister, Dmytro Kuleba, summed it up succinctly when he said Russian oil “smells of Ukrainian blood.”

A US$10 increase in oil prices boosts Russia’s current account inflow by about US$20-billion a year. For Russia, war had never been so profitable. The price of Brent crude, the European benchmark, is now up 77 per cent in a year – gas far more – and energy accounts for about half of Russian exports. Now you know why Kremlin dwellers are smiling, or were until Mr. Blinken said sanctions on Russian oil might be coming.

The question is whether an oil export ban, and possibly one on gas, would hurt the West as much as Russia. What we know already is that the pain on Europe would greatly exceed the pain on the United States and Canada.

Thanks to the shale oil boom, the United States is a net exporter of crude oil and oil products (that is, it exports more than it imports), though not by a large amount. Since Russian crude oil imports are about 3 per cent of total U.S. oil imports, banning them would hurt Americans only a bit.

Europe is not so blessed with homegrown supplies, which explains its reluctance to go whole hog on an import ban. According to the International Energy Agency, about 60 per cent of Russian oil exports go to Europe, and those exports account for a third of Europe’s oil demand (in November, Europe imported 4.5 million barrels a day of oil and oil products from Russia).

Europe is overly dependent on Russian gas, too, and the prospect of shortages has put gas markets into a tizzy. Royal Bank Capital Markets said Monday that futures for short-term delivery in Europe or Britain were trading at 20 times more than their U.S. equivalents. The enormous transatlantic price differential is also a longer-term phenomenon. One year out, European price futures were trading at five times higher than U.S. gas futures.

So Europe will enter the house of pain if Russian oil or gas exports are curtailed, let alone banned. The United States, not so much. Europe might even go into recession, since more often than not, soaring energy prices have preceded recessions. Certainly, inflation will remain high.

No surprise that German Chancellor Olaf Scholz was in a low-grade panic on Monday about a possible oil embargo. In a statement, he said: “At the moment, Europe’s supply of energy for heat generation, mobility, power supply and industry cannot be secured in any other way [than imports]. It is therefore of essential importance for the provision of public services and the daily lives of our citizens.”

What about Russia?

There is no doubt a North American and European export ban would hurt. Already, the Russian energy markets are in trouble even though energy remains exempt from sanctions. According to Energy Intelligence, Russian oil exports had fallen by a third or more by last week, even though Russian crude sells at a significant discount to Brent crude. Banking sanctions are behind the sharp downturn, plus the country’s pariah status. If non-Russian oil can be found, it will be bought.

To be sure, a European oil embargo would really hurt Russia – if it comes. Europe is highly dependent on Russian oil and gas, and a full import ban seems unlikely, perhaps even economically impossible. For Europe, the ugly reality is that many big European countries, especially Germany and Italy, slept-walked into creating economies that became ever more dependent on Russian energy exports, to the point that Germany is shutting its nuclear reactors.

Yes, an oil export ban will hurt Russia, but it will hurt Europe even more. Mr. Putin knows this.

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