Sanctions imposed on Russia in February after the start of the war locked out Energy, because it was feared that Europe was so dependent on Russian energy imports that cutting off links would lead to skyrocketing prices, shortages and economic difficulties. European public support for the concerted Western response to the invasion could be undermined.
Then came almost two months of war – devastating attacks on civilians, the horrors revealed by the Russian withdrawal from Kyiv, the upcoming massive fighting in the Donbass region. The European governments have committed themselves to this wean separated from Russian energy for several years; but now, amid growing disgust at Russian President Vladimir Putin’s tactics, the momentum for European Union energy sanctions is accelerating. It has already started with Russian Money.
But gas and oil are the big money sources for Russia’s war funding. We calculate that a complete disruption in supplies in Europe would cost the Kremlin more than $250 billion a year at current prices. Can this be done without causing massive, destabilizing economic pain? “self-sanctioning” – refiners refusing to use Russian oil, banks not providing financing – are already reducing European purchases of Russian energy. High import duties on Russian energy are currently being discussed, which are intended to force Russia to make massive price reductions in order to make its oil competitive.
However, Europe’s full detachment from Russian energy depends on skillfully managing the resulting energy shortages and turbulence. To be successful, it needs something that has been largely absent: collaboration between government and industry.
Politics must be put aside, along with recycled remarks about “price gouging” that ignore the realities of bottlenecks in the world market and discourage cooperation.
US and European governments have to work with companies on a daily basis, sharing information to coordinate a nation’s complex logistics and supply chains 100 million barrels per day oil market. This is wartime, and that means reaching back to the US government industry Cooperation of the Second World War and the “voluntary agreements” of the Korean War and “emergency committees” of the 1956 Suez Crisis, which at the time included temporary antitrust exceptions to allow the critical flow of information between government and business.
With such cooperation, sanctions against Russian oil reaching Europe could just about be manageable. According to our figures, about half of Russia’s 7.5 million barrels of crude oil and product exports per day go to Europe – which accounts for about 35 percent of total demand. President Biden’s youngest Notice A huge release from the US Strategic Petroleum Reserve was an important step to fill shortages.
US oil production will increase significantly this year. Middle East producers could quickly add more oil, but that would mean abandoning their OPEC Plus deal and easing tensions in US-Saudi Arabia relations. A nuclear deal with Iran could quickly bring more oil to market once sanctions are lifted. But Russia, a party to the deal, can unsupported an agreement that would add competitive oil to the market.
Some of the Russian casks rejected by Europe would be shipped to Asia but sold at deep discounts and their passage would be hampered by sanctions, insurance and financial restrictions, and the physical availability of ships. Lessons from 2012-2014 need to be applied here sanctions is Iran.
Natural gas is the biggest challenge as Europe is heavily dependent on pipeline supplies from Russia – usually around 35 percent of EU demand, but fluctuating up to 25 percent. While liquefied natural gas (LNG) has brought and will bring much additional gas to Europe, there is not enough additional LNG capacity or sufficient LNG globally infrastructure in Europe to make up for a shortfall from turning off the Russian spigot.
The significant expansion of renewable energies will take years. But there are immediate measures that could reduce Europe’s gas dependency: temporarily more coal use; if technically possible, no closure of the last three plants in Germany nuclear reactors; Energy saving; behavior changes (e.g. adjusting building temperatures); and possibly some form of rationing.
These moves would be a major blow politically, particularly in Germany, but as horrors continue to emerge from Ukraine, people may be more willing to accept the moves than their leaders expect. To mitigate the economic impact, governments could scrutinize Russian financial assets in Europe to compensate consumers and businesses.
A decade ago, Putin denounced the “fracking” shale revolution, recognize it as one threat. He was right to worry. If the United States hadn’t gone from importing 60 percent of its oil to the world market #1 Producer and this year the world’s largest exporter of LNG, Europe could now be its hostage. Now Putin has shown how impressive a strategic asset US oil and gas is – not only for the United States, but also for Europe in this deepening crisis.