“The EU is paying a heavy price for its unilateral energy disarmament”

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BrusselsReport.eu
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Yesterday evening, EU leaders agreed to impose a ban on most imports of oil, escalating the sanctions against Russia to the most severe level so far, as in this sixth sanctions package, the largest Russian bank, Sberbank, is being cut off from the SWIFT international payments system, and three more Russian state-owned broadcasters are being banned.

According to European Commission President Ursula von der Leyen, the agreement involves cutting off 90% of oil imports from Russia by the end of this year. About 25%, according to Eurostat, of the EU’s oil imports originate from Russia.

In order to grant Hungary, Slovakia and the Czech Republic extra time to wean themselves off crude oil supplies from Russia, the embargo contains a temporary exemption for supplies delivered via pipeline.

The ban applies to seaborne oil purchases, which make up about two-thirds of the EU’s imports from Russia, but as Germany and Poland have also promised not to make use of the exemption to get supply via pipeline from January 1st on, the ban is expected to cover 90 per cent of Russian oil imports by the end of the year.

EU leaders also declared the carve-out of Russian oil supplied via pipeline granted to Hungary will only be “temporary”, as they would return to the matter as soon as possible.

Furthermore, Hungary also secured a concession that it could still obtain Russian oil from other sources in case there would be an “accident” with the “Druzhba” pipeline from Russia, which crosses through Ukraine.

In order to avoid that Hungarian oil group Mol would be able to excessively profit from the carve-out, the EU sanctions are reportedly expected to include a ban on re-exporting Russian crude arriving via pipeline as well as a ban on the resale of refined products from Russian crude.

While commenting the deal, Belgian Prime Minister Alexander De Croo stated: “This 6th package is … for our country…an ending point for now…Especially for energy, it may now end here…This because…the goal is to carefully… implement the sanctions and because we also need to make sure not to unnecessarily hurt middle classes”

Austrian Chancellor Karl Nehammer commented:  “Gas can’t be part of next sanctions.” Other countries made similar noices.

The European Commission has not conducted an economic impact assessment on the Russian oil embargo that was agreed. Only a simulation  on ending Russian gas imports was made, no proper impact assessment, even if the European Commission still aims to cut Russian gas imports by two thirds by year’s end. Since Russia’s invasion started, Germany has reduced its reliance on Russian gas imports, which amount to more than half of its gas imports, by around 35%. It plans to further reduce imports to 30% of its overall gas imports by the end of 2022. In any case, Russia seems to have already cut gas supplies to the Netherlands and Denmark for refusing to comply with a demand to pay for gas in roubles, after having already cut off Poland, Bulgaria and Finland.

In response to the sanctions package, oil prices extended a bull run, further increasing concern about Eurozone inflation, as Eurostat today also announced that Eurozone inflation amounted to a record high of 8.1 percent year-on-year. “A further ban on Russian Crude delivered by shipments will tighten already strained supply amid rising demand due to onset of driving season in [the] United States” according to Avtar Sandu, senior manager of commodities at trading platform Philip Nova.

The European Commission is currently examining temporary price caps and potential reforms to EU electricity market regulations, on request of Spain and Greece, with Germany however opposing this.

Economist Daniel Kral, of Oxford Economics, comments on Negocios TV: “For the EU, it is easier to switch suppliers [for oil than for gas imports from Russia]. With gas, the global output is much more constrained and it is much more difficult to ramp up capacity”. The full interview:

In an analysis for Atlantico and the Friends of Science blog, Belgian-Italian Professor Samuel Furfari, who has serverd as a senior official at the Energy Directorate-General of the European Commission between 1982 and 2018, comments:

“How to do without Russian oil, whose refineries in the countries of Central and Eastern Europe were built in the 1950s and 1970s to process this particular type of oil? This is why Hungary refuses this embargo. A landlocked country, it will have more difficulty than others in importing crude while the Druzhba pipeline brings it home with cheap black gold.

Although Article 122 of the Treaty of Lisbon deals with solidarity between Member States “particularly in the field of energy” (sic), when it comes to security of energy supply, the spirit of solidarity fades.

Of course, refineries can be adapted to other types of oil, but this requires time and investment. Companies rightly wonder if these investments to process other crudes will be profitable. It is not easy, because one day – at the latest when Vladimir Putin is no longer in power – cheap Russian oil will again be imported into the EU. Isn’t that what was done with oil from the Middle East or Libya after the respective crises? Isn’t that what Joe Biden is currently planning with Iran and Venezuela and who makes the Wall Street Journal say that Biden is dancing with a Latin American dictator? Oil is so vital (92% of the energy of our transport system) that its vast market always wins out, and Russia obviously has an impregnable weapon: its low production costs and its pipelines.

The EU is trying to blame Russia for the high prices that citizens unfortunately have to pay for their fuel, cooking gas and electricity. This absurdity does not stand up to analysis at all.

Have we really forgotten the spike in oil and natural gas prices in the last quarter of 2021, when there was no war in Ukraine? Between April and December 2021, the price of crude oil rose from around $40 per barrel ($/bbl) to around $80/bbl and, during the same period, the price of natural gas increased tenfold. (…)

Prices had risen sharply due to the strong recovery in China and Asia in general. When the recovery started in the EU, the market could not meet demand and it was normal for prices to rise. (…)

Besides the high demand, there is a more pernicious reason: the lack of investment in an industry that has always operated in continuous flow. Unlike, for example, a Tesla mega-factory or a nuclear power plant, the production of hydrocarbons requires continuous investment in prospecting and exploration. However, the EU has decreed in its Fit55 strategy that fossil fuels (which meet three-quarters of our energy demand) should be phased out and replaced by renewable energies, mainly wind and solar, while all efforts over the past half-century n made it possible to satisfy only 2.9% of the primary energy balance thanks to them. (…)

One would have thought that the war in Ukraine would open the eyes of the EU to its headlong rush, but the European Commission’s REPowerEU communication of 18 May accelerates the race towards the precipice, even going so far as to completely ignore the main EU’s source of electricity – nuclear electricity ― in order to promote only renewable energies. The “RE” obviously stands for Renewable Energy. A correspondent pointed out to me that REPowerEU will lead to RIP…EU. (…)

Added to this are the policies of Western banks that want to be “green” and therefore limit their loans to fossil fuel projects, which are essential for the world to “run”, since fossil fuels represent 85% of global demand. In addition, the boards of directors of energy companies must now face pressure from “green” investors, as was the case at the last general meeting of the giant ExxonMobil and in France with the change of name of TotalEnergies to avoid the image of the ugly tanker. This discourages young people from entering the fossil fuel industry, and a new phenomenon is emerging in the United States: a shortage of engineers and technicians in highly technical and innovative professions.

With the EU no longer the center of the world, demand for fossil fuels will continue, so energy prices are unlikely to stay at their high levels for long, especially as the war in Ukraine comes to an end sooner or later. The world has plenty of fossil fuel reserves and non-European companies will produce enough energy to satisfy the whole world. The world is not going to stop spinning because of the sanctions against Russia. Cyclical in nature, the market will be flooded with energy and EU companies will watch the train go by.

Will the war in Ukraine raise awareness that the world will continue to depend on fossil fuels, as the International Energy Agency had been saying for years, only to backtrack on its analysis because it was no longer politically correct? OPEC said last March that ”the IEA has compromised its technical analysis to fit its rhetoric .” Respectable and respected until recently, she will also be a victim of the renewable dream. Who will dare to denounce this race to the bottom? The recent BaFin decision, the German financial regulator, is it an epiphenomenon or a new trend? It has just delayed the adoption of the German taxonomy which was supposed to decree which investment funds are sustainable.

Either way, the EU is paying a heavy price for its unilateral energy disarmament.”

 

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