German Chancellor Olaf Scholz with supporters of the embargo. Photo: Jens Schlueter / AFP / Scanpix / LETA

It is impossible to ban the export of Russian oil

In the next two years, the world will not be able to do without it, which is why no one is actually going to introduce an embargo, says economist Dmitry Nekrasov

From December 2022, the sixth package of EU sanctions comes into force, which, in particular, involves the so-called oil embargo against Russia - a ban on exports to the EU, a ban on EU companies financing and insuring the transportation of Russian oil. This set of measures will have many negative consequences for the Russian oil industry - from price discounts to logistical problems. However, the question remains debatable to what extent these bans can reduce not the revenue or profits of Russian oil workers, but precisely the physical volume of Russian oil exports.

We will consider this issue not from the usual point of view, whether the West has the tools to prevent Russian oil from being redirected to the markets of third countries. In conditions when most of Russian oil is exported by sea, and China alone is able to buy all Russian oil exports one and a half times, the dispute over the availability of such instruments, in fact, comes down to a dispute about how much the West is able to force Chinese and Indian companies to abandon purchases of Russian oil.

In my opinion, the more significant question is whether the declared goal of reducing the physical volume of Russian oil exports is the real goal of Western sanctions over the horizon of the next two to three years. I will express this seditious thought: if European politicians had really admitted, even for a second, the possibility that their embargo could significantly reduce the physical export of Russian oil, they would not have introduced it, as with gas. And if Putin announced tomorrow that he himself was stopping the export of all Russian oil “for technical reasons,” then they would immediately enter into negotiations so that Putin would not do this, as he is doing now with regard to gas.

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At the beginning of March, when everyone was shouting: “Stop buying bloody gas!” — I warned that in the next one or two years, gas exports are not so much a lever of pressure from the EU on Putin, but a lever of pressure from Putin on the EU. Now the same people are talking about “outrageous gas blackmail”, without seeing any contradictions in their position. It is clear that in the next three to five years the EU will learn to live without Russian gas, and Russia will lose gas exports irrevocably. However, for the next couple of years the balance of losses is reversed. And it’s exactly the same with oil.

The global energy balance is uniform. One thing is the situation when the Russian Federation stopped exporting to the EU, increasing exports to third countries, while the Gulf countries, on the contrary, reduced exports to China or India and increased them to the EU. In this case, the amount of oil on the world market has not changed. Russia suffers losses on discounts, and the world economy suffers minimally. The situation will be completely different if Putin stops supplies of Russian oil completely tomorrow.

Let's imagine the consequences of such a development of events.

Three crises and one disaster

Today Russia produces about 10 mbd (million barrels per day), which is just over 10% of world oil production. It exports a little more than 7.5 mbd of oil equivalent (if, in addition to crude oil, we also count the export of petroleum products). This is more than 7.5% of world consumption and about 17% of world exports (most of the oil is consumed in the producing countries themselves, for example in the USA and China, less than 45 mbd circulates on the international market).

To assess whether this is too much or too little, it is reasonable to consider what happened to the supply of oil during previous oil crises and how the world economy responded.

Global oil production has fallen three times over the past half century: during the 1973–1975 oil crisis by 4.5%, between 1979 and 1983 by 15%, and during the 2020 pandemic by 10%. Both for reasons and consequences these were different declines.

The crisis of 1973–1975, when Arab countries decided to punish the Western world for supporting Israel, is remembered by the world for hippie picnics on empty highways, bans on traveling in cars with fewer than three people, coupons and queues at gas stations, a change in the GDP growth rate of developed countries from consistently positive to negative, with unemployment and inflation increasing significantly. All this was provoked by a drop in volumes of only 4.5% at the peak, and if we take the average values ​​of global production over the three years since the beginning of the crisis, then it simply did not grow for three years.

The decline in production in the early 1980s, when Saudi Arabia cut production threefold to maintain prices, was relatively painless for the global economy. The fact is that by that time, frightened by the oil shock of 1973, developed countries were already actively reducing their energy dependence in all possible areas - from a massive transition to small cars to the accelerated development of nuclear energy. At the same time, strategic oil reserves began to be created around the world in case of future supply disruptions. In particular, the US Strategic Petroleum Reserve was accumulated from zero to current levels of approximately 500 million barrels between 1977 and 1985. Similar reserves were created in other countries, not only by the state, but also by private entities. As a result, the decline in oil production in the early 1980s essentially reached the levels of its current consumption.

If suddenly Putin really decides to add oil blackmail to gas blackmail, then it is very likely that various Islamic terrorists, rebels and lovers of Salisbury spiers will begin to blow up pipelines more often than usual

A similar situation occurred in the pandemic year of 2020, when due to lockdowns, production stops, flights and transportation, consumption fell more than production. Accordingly, the reduction in oil production could not have a serious additional impact on the economy.

Today we have a completely different situation: coming out of the pandemic, the growth in oil production does not keep pace with the growth in consumption, oil reserves have been declining for the last year and a half, and global investment in oil production has been going on for eight years in a row. Therefore, if we model the scenario of the real withdrawal of Russian oil exports from the world market, we must focus specifically on 1973, when 4.5% left the oil market at its peak, and not 7.5% forever.

Let me also remind you that, with the exception of the periods of the crises described, in general, oil consumption in the world is growing steadily (as well as energy resources in general throughout human history). Now this growth is happening thanks to developing countries. For example, over the past 15 years, China has more than doubled its consumption, becoming the world's number one importer of oil, and India has increased its consumption by more than one and a half times, becoming the world's number two importer.

The growing middle class in developing countries is buying their first cars and multiplying their consumption of petrochemical products - building materials, clothing, cosmetics, etc. All kinds of stories about green energy, hydrogen and electric cars are about rich countries, whose share in oil consumption is already 30 years is declining. It is not those consumers who are investing hundreds of billions in new energy that are increasing demand. EU efforts to reduce energy consumption will have no impact on demand growth in Africa or Southeast Asia.

A sharp decline in oil consumption on a global scale will certainly lead to rising prices and, accordingly, to a deep structural crisis. And this crisis will hit primarily the industrial economies of developing countries. It will be pure 1973 there.

There is no one to replace Russia

Now let's try to analyze the possibilities of replacing Russian oil exports in the next couple of years. The vast majority of oil producers today produce within existing capacities. There are few exceptions, we list the main ones.

Traditionally, Saudi Arabia had the reserves for rapidly increasing production . But in many respects this is a thing of the past due to many years of declining investment in the industry and the refusal to develop new deposits while extracting old ones. Today Saudi Arabia produces about 10.5 mbd. A couple of months ago, the management of Saudi Aramco (which produces Saudi oil) announced “ambitious” plans to increase production to 12.3 mbd in 2025 and 13 mbd in 2027. I believe this is the technological limit for increasing production (aka the historical maximum). It is clear that in the long term, Saudi Arabia, which has large volumes of relatively easily produced oil, can increase production much more, but this will require the development of new fields. Thus, the maximum that can appear here is 1.8 mbd in three years and 2.5 mbd in five years.

Another country that, in theory, can significantly increase production is Venezuela. It produced 3.5 mbd in 1998 and less than 1 mbd in recent years. But the oil infrastructure of Venezuela is in a catastrophic state, the fields themselves are characterized by much more difficult production conditions than in the Gulf, while the properties of most Venezuelan oil are such that its processing requires specially configured oil refineries, mixing with other varieties, etc. Even if we assume a miracle that tomorrow the Maduro regime will be replaced by a reasonable government installed by the Americans, which will quickly resolve long-term disputes with foreign oil companies and countless creditors that were once expelled from the country, give concessions back to foreigners, and also return oil engineers who fled from the country, then It will take many years to restore what was destroyed and significantly increase production. I'll leave here a fantastic assumption that they might add 1 mbd in two years, but I don’t even believe in it.

The third possible source is Iran, which not long ago produced 4.6 mbd compared to 3.3 mbd now. I admit that with the political will of the West to return to the nuclear deal, the indicated 1.3 mbd can be increased relatively quickly, but even here everything is not so simple. Unlike Venezuela, Iran's oil industry suffered not so much from mismanagement as from Western technological sanctions. Many elements of the infrastructure have also degraded for decades. If we are not talking about the return of what was recently lost, but about a long-term increase in production, then it is hardly possible without the arrival of Western oil companies, which is extremely unlikely under the current political regime. But 1.3 mbd in two years is much more realistic than 1 mbd from Venezuela.

has a capacity reserve The United Arab Emirates , one of the few OPEC countries that consistently selects its production quota, also . Let's estimate this reserve at 1 mbd.

The last resource for additional oil production is the so-called unconventional sources - from shale oil to Canadian tar sands. During the 10-year shale boom of 2010–2020, U.S. unconventional oil production rose from less than 1 mbd to more than 8 mbd. That is, in conditions of ultra-high oil prices and record investments in the industry, growth was about 0.7 mbd per year in the United States and less than 1 mbd per year around the world. It is growing at approximately the same rate now. According to the forecast of the American authorities, in 2023, production in the United States will increase by 0.84 mbd mainly due to shale oil. Theoretically, a sharp rise in oil prices could stimulate faster growth in production from unconventional sources, however, even here there are many technological limitations such as the number of available drilling rigs, etc. If oil prices are more than $200 per barrel, it can be assumed that by 2027 –2028, unconventional sources of oil will fully compensate for Russian exports. However, at such oil prices, one should rather expect a reduction in demand due to large investments in energy saving and alternative energy. Which, on the one hand, sounds good, but on the other hand means a full-scale structural crisis of the world economy.

There are no other significant reserves for rapid growth in production.

If we add up the numbers, it turns out that on the horizon of two years - in an ideal situation - we have an unattainable maximum of 6.5 mbd against 7.5 mbd of Russian exports.

At the same time, we forgot that if the world economy grows at least minimally, then the demand for oil usually also grows, at least by 1 mbd per year, that is, by 2 mbd in two years. And we also forgot the oil-bearing regions, where production has inevitably declined recently due to depletion of reserves or political instability, as in the North Sea or Nigeria. Even with high oil prices in general, such regions will still continue to decline, even if by 0.5 mbd over two years per round. In total, another 2.5 mbd will fall out in two years.

In general, no matter how you look at the reserves, it is obvious that over the next two years, in order for the world to avoid a serious energy shock, it is necessary to maintain Russian exports at at least 4–5 mbd of oil equivalent. But this is also a utopia. In reality, even the loss of a quarter of Russian oil exports will be extremely sensitive.

And there is another next level. If suddenly Putin really decides to add oil blackmail to gas blackmail, then it is very likely that various Islamic terrorists, rebels and lovers of Salisbury spiers will start blowing up pipelines in the most inappropriate places more often than usual and launching drone attacks on petrochemical complexes worth many billions of dollars. And then there is Kazakhstan’s export of 1.7 mbd, which mostly goes through Russian territory, and further down the list. And all this in parallel with the gas crisis that has already begun.

Embargo for show

It is clear that in a few years the world economy will be restructured and will do without Russian oil. Both due to energy savings and due to increased production in different places around the world. But the same is clear about gas, which does not prevent gas blackmail. People who like to rattle nuclear weapons must be foolish to think about economic prospects on a five-year horizon if they have the opportunity to inflict unacceptable damage on the enemy within two years.

Of course, I don’t believe that Putin will actually decide to blackmail the world with an oil crisis. The costs are disproportionate. If the Russian economy as a whole can survive without gas exports, then without oil its safety margin will be enough just for those very couple of years during which the world economy adapts to the loss. However, I also did not believe in the beginning of a full-scale war with Ukraine and I turned out to be wrong.

However, I did not write this text about the unlikely threat of oil blackmail from Russia. And about the fact that talk about an embargo in the sense of a significant reduction in the physical volumes of Russian oil exports is nothing more than PR for European voters. Even if the West really had the tools for such restrictions, no one in their right mind would do this, which is well illustrated by the gas issue.

This does not mean, of course, that European sanctions do not in any way affect the Russian oil sector, economy and budget. Discounts to the price of Russian oil caused by sanctions reduce export revenues by 20–30%. Logistics costs have risen, and technological restrictions on equipment imports are undermining the long-term prospects of the Russian oil industry.

However, a sharp decline in the physical volumes of Russian oil exports from next year is associated with disproportionate damage to the entire world economy, and therefore such a goal was never set in reality.