Half of the crude oil exported by the country is sent to European countries
Russia produces about 11 million barrels a day of crude. It uses about half of this production for its own domestic demand, which has presumably increased due to increased military fuel needs, and exports between 5 and 6 million barrels per day. Russia is currently the world’s second largest oil producer, behind the United States and ahead of Saudi Arabia, but sometimes that order changes.
Approximately half of the oil exported by Russia – some 2.5 million barrels per day – is sent to European countries such as Germany, Italy, the Netherlands, Poland, Finland, Lithuania, Greece, Romania and Bulgaria. Nearly a third reaches Europe via the Druzhba Pipeline via Belarus. These 700,000 barrels a day in pipeline shipments would be an obvious target for some form of sanctions, either by prohibiting financial payments or refusing deliveries across the spur lines at the border with Belarus.
In 2019, Europe stopped accepting deliveries for several months from the Druzhba line when crude oil flowing through it became contaminated with organic chlorides that could have damaged oil refineries during processing. Russia’s oil shipments decreased markedly as flows were redirected to avoid the Druzhba line.
China is another big buyer. It imports 1.6 million barrels a day of Russian crude. Half comes via a special direct pipeline, the East Siberian Pacific Ocean Pipeline, which also services other customers through a port at its endpoint, including Japan and South Korea.
What if some countries reduced oil imports?
Sanctions against the Russian oil industry would have a greater impact than limiting natural gas flows because Russia’s oil revenues are larger and more critical to its state budget. Russia earned more than $110 billion in 2021 from oil exports, double its revenue from foreign natural gas sales.
Since oil is a relatively fungible global commodity, much of Russia’s crude exports to Europe and other G7 countries could end up being shipped elsewhere. This would free up other supplies from sources like Norway and Saudi Arabia to redirect to Europe.
Russian oil is high in sulfur and other impurities, so its refining requires specialized equipment: it cannot be sold anywhere. But other Asian buyers can accept it, such as India and Thailand. And Russia has special supply agreements with countries like Cuba and Venezuela.
However, it is already clear that Russia is having trouble redirecting its crude sales. At the start of the Ukraine invasion, European refiners began to shy away from spot shipments for fear of sanctions.
India bought cargoes of Russian crude that were already at sea, at a steep discount. Markets are likely to respond to a G7 oil ceiling with further discounting of Russian crude. We already saw the same pattern in the past when countries sanctioned Venezuelan oil and Iranian oil: Those nations continued to find buyers, but at reduced prices.
Other sources to obtain oil
Oil shipments are arguably easier to redirect than natural gas, which has to be supercooled to liquefy for shipping, then converted back to gas at its destination port. This means that Russian crude may be easier for European countries to substitute and redirect than their natural gas, which is more reliant on pipeline supply, depending on market conditions.
To ensure the availability of replacement barrels, Europe and the United States could simultaneously increase crude sales from their national strategic reserves to cushion the blow of any restrictions on Russian crude imports to the G-7. The United States is already selling 1.3 million barrels a day from its Strategic Petroleum Reserve, and could increase these flows. China has also released oil from its national strategic reserves to help ease oil prices.
The United States and other members of the G-7 are also likely to ask Middle Eastern countries to relax destination restrictions on their crude shipments and pressure countries such as China and India to redirect oil of similar quality to Europe. Russian, as long as they increase their purchases from Moscow. These measures would reduce the chances that the G-7 restrictions on Russian oil imports would drive up world prices.
It is not certain that China and India will cooperate, but it would be to their advantage to do so. They are big importers of oil and would not want oil prices to rise.
How would world oil prices be affected if G-7 nations bought less Russian oil? It would depend on what measures governments take in response to the diversion of Russian oil exports. Countries are already acting to prepare world markets for changes in liquefied natural gas flows should purchases from Russia be curtailed.
Involve other capitals
G-7 energy diplomacy is likely to involve other oil capitals that may be willing to export more oil to ease the disruption to Russia’s crude sales. Most exporters are at the limit of their crude production, but some of the largest producers in the Middle East could increase their production in the short term to put on the market a million barrels a day or more.
US-Saudi relations could face a test. Riyadh has access to large stores of crude oil in its vast global tank system and in its tankers floating in the sea. In 2014, when Russia invaded Crimea, US allies in the Persian Gulf had more than 70 million barrels in storage near Fujairah in the United Arab Emirates. They did so as a threat to Russia that a price war would ensue if Russian troops moved beyond that peninsula. Russia stayed in Crimea, so the oil was not released.
Saudi Arabia has instituted price wars that hurt Russia’s economy in 1986, 1998, 2009, and again briefly in 2020. But current oil market conditions make a price war unlikely, given the tight balance in place. between supply and demand. The only scenario that could trigger a price war now would be if global demand suddenly contracted due to a recession.
This article has been published in The Conversation