An oil embargo is not the way forward for Europe – POLITICO

Guntram B. Wolff is Director of Bruegel, Brussels. Simone Tagliapietra and Georg Zachmann are Senior Fellows at Bruegel, Brussels.

The European Commission’s plan to target Russian oil in its latest sanctions package aims to increase pressure on Moscow.

Oil is a major source of foreign exchange for Russia, and since the introduction of financial sanctions it has become even more important to the country’s economy and a crucial source of funding for its war against Ukraine.

Crucially, however, the proposed imposition of an embargo on Russian oil could prove counterproductive – at least in the short term – and there is a better option.

Undoubtedly, one of the immediate consequences of the announcement of a gradual embargo will be an increase in prices; and with Russian oil sales to the European Union set to continue for several more months, this could very well increase Russia’s profits and provide a short-term boost to its budget during the raging war.

While phasing in would give Europe time to develop alternative oil supplies, it would also give Russia time to secure new export opportunities. And while measures to limit Russia’s access to shipping are a key part of the EU package, they may not be enough to deter alternative customers to Russian oil in an energy-hungry world.

Finally, a price hike following the embargo announcement will weigh on the global post-pandemic recovery – which is why US Treasury Secretary Janet Yellen called that the EU is cautious about banning Russian oil.

Even at this late hour, the EU should consider another avenue – that of an immediate punitive tariff on all Russian exports of crude oil, oil products and possibly natural gas.

A tariff would be a flexible tool to increase or decrease pressure on Russia, depending on the situation in Ukraine.

It would immediately reduce Russian revenue while still giving Moscow an incentive to sell to Western buyers. As oil and gas would continue to flow, global prices could well fall further hurting Russian gains. Finally, there would also be less reason for Russia to quickly build new infrastructure to export fossil fuels to third countries.

The reason why the tariff option has so far been rejected is due to two misconceptions by European politicians: first, that it would raise prices for consumers more than other alternatives, and second, that Russian President Vladimir Putin would not accept it by saying that opted to stop the oil instead gas flows immediately.

However, the price effects of a tariff depend on the ability of sellers and buyers to find alternatives. The more difficult it is for Russia to develop new export routes and the easier it is for the EU to find alternative sources of oil and reduce domestic demand, the more willing Russia will be to pay the tariff.

With infrastructure bottlenecks currently preventing any significant diversion to Asia, Russian oil and gas exports to Europe tend to be inelastic in the short to medium term. The EU therefore has a real chance to ensure that most of the tariffs are paid by Russia and not passed on to EU consumers.

With a bold energy strategy, Europe could credibly threaten to cut Russia’s oil and gas revenues while minimizing the domestic economic impact of a tariff. And to improve its position, the EU should aim to reduce oil and gas demand across the bloc while increasing the use of all available alternative energy sources.

Of course, to reduce demand for oil and gas, subsidies must be eliminated and citizens encouraged to consume less. Such measures are politically difficult, but they are urgent now.

Indeed, government responses to energy price hikes have mostly been counterproductive, increasing rather than decreasing the EU’s dependence on Russia. Direct energy price subsidies and tax cuts have supported oil and gas consumption. These measures, originally designed to quickly fix what appeared to be a temporary problem, have now evolved to structural proportions.

European governments need to recognize that higher energy prices are part of the solution, not the problem, and that reducing demand for oil and gas is key to increasing our energy resilience.

Europe needs to fill up its gas storage facilities before next winter to avoid Putin’s energy blackmail, and now every cubic meter of gas that is not used counts. Governments should have the courage to tell their citizens that Europe is in the midst of what may be the worst energy crisis in its history.

According to the International Energy AgencySimple measures like turning down the thermostat or turning up the air conditioning by just 1°C, working from home if possible, or reducing motorway cruising speed by 10 km/h could save enough oil to fill 120 supertankers, and enough natural energy gas to heat 20 million homes.

Compared to difficult and expensive supply-side options like finding significant additional LNG volumes, demand-side options like this could be a significant and quick win.

And as for triggering Putin’s retaliation with a tariff, it may well happen – the recent halt in supplies to Poland and Bulgaria shows that this possibility should not be ruled out. However, the proposed phase-in of an oil embargo would only further increase the likelihood of such a supply freeze – and is clearly Europe’s worse option. An oil embargo is not the way forward for Europe – POLITICO

Fry Electronics Team

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