Analysis | The implications of the US, UK veto on Russian oil imports

It had been an open secret for some days, but the White House finally took the step on Tuesday. A week-and-a-half after leaving energy outside its initial sanctions package, the United States announced yesterday that it will stop importing Russian oil and gas as retaliation for the invasion of Ukraine. And it won’t be the only one: hours later, the United Kingdom signed up to the initiative too, albeit in a more gradual manner, thus ramping up the pressure on the Russian economy, which is particularly dependent on fossil fuel exports. Here are the key points and the repercussions of the measure.

How much oil do the UK and US import from Russia?

Russian oil’s weighting in the US energy mix is minimal: less than 8% of the crude that the world’s superpower buys comes from the Eurasian country, a figure that is very similar – albeit slightly higher – in the case of the UK. While in the short term there could be some tensions in a market that’s as active and global as oil, it will not be difficult to replace this production via third countries – granted, at much higher prices.

How can Russian supply be replaced?

There are a number of factors that will alleviate the situation. For example, the most important one will be the powerful fracking sector in the US, which next year will be raising its production to a new historic high of 13 million barrels a day, according to the US Energy Information Administration (EIA). The second is the return of Iran to the market, something that will happen when a new nuclear deal is signed. This will lead to an injection of a million barrels of oil a day – nearly a seventh of what Russia produces.

The third and most unexpected is Venezuela. The US government sent a high-level delegation to Caracas at the weekend to address “energy security” issues – i.e. lifting sanctions on the country in order to guarantee an extra supply of oil.

Will the European Union follow suit?

This question cannot be answered right now, given the differing sensitivities of its member states. On the one hand, Germany is refusing to give up Russian fossil fuels given their importance for industry and homes. On the other, France and the Netherlands – which don’t import so much from Russia – are open to any possibility, and are not ruling out any scenario. Italy and Spain, meanwhile, are yet to express an opinion.

Pressure is growing on the bloc given the UK’s lightning fast response to the initial move by the US. The only thing that is clear so far is that this decision will be a common one and not individual. Whatever happens, it will be logical to assume that the measure will be limited to crude oil and not gas, which will be much more difficult – and costly – to substitute in the very short term.

What consequences will this have for Russia?

If the veto is limited to the US and UK, the consequences will be modest. However, if the EU – which buys 60% of its crude production and even more gas – opts to cut ties with its eastern neighbor, the impact will be huge. At current prices, the sale of fossil fuels to European partners brings in more than €1 billion ($1.1 billion) a day to Russia, according to data from Simone Tagliapietra, a researcher from the Bruegel think tank. This money is essential to supporting the military campaign in Ukraine, at a time when around half of its central bank’s reserves have been blocked by the West.

Even if the EU makes the move, Russia still has a trump card: China. This economic giant needs huge amounts of crude oil every day and has shown no sign that it will cut ties with Russia. The Asian country buys around a fifth of what is sold abroad, but there are few doubts that Beijing will take advantage of the situation to buy up greater quantities at lower prices. According to news agency Bloomberg, this could lead to it possibly taking positions as a stakeholder in major Russian energy or commodities firms. This would be a major opportunity, but one that is loaded with risk: no one knows how Russia will emerge from the Ukrainian saga.

Why is the price of oil rising?

Fundamentally, because lower supply always leads to higher prices. Russia is one of the biggest oil producers in the world, the second-biggest on the planet after Saudi Arabia. After the announcement of the measure on Tuesday, the cost of a barrel of Brent crude – the benchmark in Europe – rose sharply to $125 a barrel, its highest level in 14 years.

This rise will not just have consequences in the US and the UK, but the world over: more expensive oil results in price rises for gasoline and diesel, and lower disposable income for households for the consumption of other products and services.

How high could prices go?

This largely depends on how this situation lasts and how many countries end up backing the measure by the US. If the veto by Washington lasts until the end of the year, investment bank JP Morgan believes that Brent crude could rise to $185 a barrel, which would be a 40% rise compared to current levels and would break previous records.

Should the EU sign up to the measure, the price rise would be exponential: more than half of the Russian production would disappear from the global market. Norwegian consultancy Rystad Energy believes that the price of crude could hit $200 a barrel. The consequences of this on inflation, which is already very high, would be disastrous.