Russian oil sanctions: Ricky Gervais once said, “Remember, when you are dead, you do not know you are dead. It is only painful for others. The same applies when you are stupid.” Little did Ricky know that the second part of his analysis is well applicable to the part of the globe he belongs to. In their attempt to thrash a man who can’t be bullied with logic, the west has decided to let go of the control on its energy supplies.
New sanctions on Russia
New rounds of sanctions on Russian oil have kicked in. After trying to halt Russian crude oil trade, the sanction regime is now after finished products like diesel, jet fuel and gasoline. Any ship carrying made-in-Russia refined petroleum products will need to abide by the $100 per barrel price cap. If they don’t, then there is an extremely low chance of them getting insurance for the journey.
Given the fact that 95 per cent of ocean going tankers are insured through London, the probability that the majority of Russian oil tankers will evade the sanctions regime is minimal. One way to circumnavigate the cap is to add frivolous freight and other charges that custom authorities do not normally cross-check. It is yet to be seen whether the model used for evading crude oil sanctions will be successful in these categories. Russia can’t bet on these probabilities and will have to look for alternate destinations.
While Russian suppliers may find alternate markets, the problem is bigger for the west as a whole and Europe in particular. Not long ago, Russia used to deliver 27 per cent of the total diesel needs of Europe. Germany, Britain and France, the big daddies of Europe, have traditionally been more dependent on Russian diesel, just like for gasoline, crude oil and LNG. If we include gasoline in this calculation, problem gets worse for countries like Slovakia, Lithuania, Poland and Finland.
Talking about the whole of the European Union and their separated brother United Kingdom, it is wrong to say that they have been dependent only on Russian crude oil and Liquified Natural Gas. For the last 15 years, there has been a steady increase in the share of finished petroleum products in Russian energy supply to the bloc. In FY21 and FY22, the share of gasoline and diesel rose as high as more than 50 per cent of total Russian energy in the region.
In 2023, if they are given a choice between gasoline and diesel, securing diesel becomes more important for them. Since the continent is on the verge of a food crisis and shortage of trucks available for supply can seriously worsen it. Apart from trucks, farm equipment, city buses and industrial equipment are also highly dependent on diesel. Add to that farmers’ protest against woke environmentalism in the Netherlands. The Dutch are one of the biggest exporters of food in the world.
Given the unemployment, given the food crisis and given the supply-chain crisis, the continent has to mandatorily secure steady diesel supply. Not ensuring it can put upward inflationary pressure on the economy. America’s case is not much different. Their green energy dreams will take decades to fructify. They themselves are finding it hard to strike a balance between their own needs and exports to their friends.
Options for west and complications associated with them
So, what options do they have for alternate sources? It is tough to decide which way they will tilt. The Middle East and North Africa (MENA) region is one such option. North America is another such option. Looking at the way Europe has diversified its diesel portfolio in the last few months stands as strong testament to that. At the time when Russia’s share of Europe’s diesel imports is continuously decreasing in terms of percentage, refineries from these two regions are constantly pouring diesel into Europe.
In fact, American supply of diesel to Europe has registered a massive jump in terms of year-on-year trends. While in the beginning of 2022, Americans supplied 34,000 barrels of diesel a day to Europe, the number has increased to 237,000 barrels per day by the beginning of 2023. That is an enormous increase of 600 per cent. Sure, that is not enough, but Americans are earning some brownie points. But most likely Biden won’t be able to do the same in 2023.
The problem with American diesel supply to Europe is that the 2024 elections are on the horizon. With the revival of the Trump campaign and De Santis emerging as another strong contender, Biden would not want to continuously supply Europe with diesel, while Americans themselves reel from effects of high inflation. In any case, American export and import of energy needs remain in close proximity with each-other.
Additionally, America has further complicated the problem by not remaining in the good books of the Arab world. Uncle Sam has been asking the Saudis to cooperate in the wake of the Ukraine-Russia war by increasing their oil production. The response has been disappointing in the larger picture.
Same holds true for its relation with the UAE. There are efforts to bridge the trust deficit, but given America’s withdrawal of security guarantees from the region, it is becoming increasingly tough to predict the picture. Moreover, the way Americans have hounded Putin-led countries and imposed sanctions on Russian oil is going to increase the problems. The Middle East is also worried about its future as tensions with Uncle Sam are brewing. Saudi Arabia is already looking for a place in BRICS grouping.
The hope for future energy security of Europe is further compromised by the new tensions between Americans and the Arab World.
This fear is one reason why there is an impetus on diversifying the energy import basket. By August last year, it was becoming clear that Europe needed Asia to secure its apocalyptic energy needs. Asia’s share in Europe’s diesel imports had increased by 220 per cent from July. It was a shocking revelation to say the least. But Asia does contain behemoths like India and China. Both India and China are the ones mainly responsible for keeping Russian oil afloat in the international market.
Both countries have refineries of their own to process Russian Ural Crude and convert them into refined products. Clearly, both countries can export refined products like diesel and gasoline to Europe. The problem is that, it has become politically incorrect in that part of the world to buy made-in-China products, even if it’s diesel.
India rising to the occasion
India is the only big power in Asia these countries can rely on for a steady supply. And the numbers stand as strong testament to it. Recently, Standard and Poor’s (S&P) came up with its own analysis of Europe’s diesel import basket.
According to the analysis, India’s share in Europe’s diesel import has only increased in year-on-year terms. In fact, during March, October and December last year, the spike was abnormal and settled down at the level slightly below, but above that of earlier figures in the next few months. When it comes to non-Russian diesel to Europe, India is the 3rd largest supplier of diesel to the continent. It is unbelievable, but also a fact.
It is well-reflected in India’s trade-basket with European nations as well. During the first half of this financial year, the Netherlands became the top destination for India’s petroleum products. Increased energy trade has its impact on overall trade as well.
Russian oils are also included in India’s exports to Europe. The fact that India has a refining facility as well as cheaper crude availability has played a significant role in this. Indian companies receive Russian Ural crude. Then they process it in their refineries, mostly in Jamnagar. After that the Russian crude takes indirect entry into western markets.
The number is only growing. Most recent bloomberg report reveals that in January, just the state of New York got about 89,000 barrels per day of gasoline and diesel from India. To Europe, India transported 172,000 barrels per day of low-sulphur diesel per day. In January this year, India supplied nearly 400 kilo barrels per day of fuel to America and the European Union. Astoundingly, it is still lower than the peak figure of 425 kilo barrels which India clocked in March this year.
The increased supply is on the back of India securing an exemption for itself in the oil price cap imposed by America and its allies. It won’t be an extreme extrapolation to state that the new sanction regime won’t be much different for India.
Why India is at the centre
In fact, it is only going to help India. China and India are two best options for Russian oil. The thing with China is that, demand for oil in that barren land is falling, as one would expect from a declining economy. Just like the declining growth rate, it is tough to resurrect the demand to previous highs until Jinping comes up with an authoritarian miracle.
The next best option is India. If Russia is not able to fully plug the gap caused due to the latest round of sanctions on Russian oil and petroleum products, then it can again rely on India as a saving grace. India produced one of the most magnificent budgets in recent history. This is during the year in which 10 assembly elections are due. Additionally, it was also the last major budget before the General election 2024.
There was not an iota of populism in the budget. In fact, budgets for populist and vote pulling schemes like MGNREGA were cut and emphasis was on long-term infrastructure spending.
It is a loud and clear message to investors and a green signal of high growth rates. In the terms of oilonomics, high growth rate translates into no dearth of crude oil import needs. India already imports more than 80 per cent of its oil requirements. With inflationary pressure reducing, the floodgates are open for more Russian oil, which has already crossed the psychological barrier of 1 million barrels per day. The only problem which could arise is refineries’ inability to process the increased supply, something which we have been able to fend off till now.
There is political benefit for the west in aligning with India as well. India currently has good relations with the Arab World. The UAE and Saudi Arabia are one of the largest trading partners of India. India is also a part of a group called I2U2 of which America is also a partner, but not always appreciated. The US has a history of blunders with big Arab powers. It won’t be wrong to say that the US is vouching for India to play the role of peacemaker in case it blunders any further. And that’s where the hopes of Europe are hooked at.
The upcoming few months are going to be a game changer for both the West and India. India, being at the centre, holds the key to the future of energy in the western world.
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