Europe’s proposed ban on Russian oil could leave Moscow scrapping for $70 a barrel on a good day

Crude oil prices rose a mere 3% after the European Union, the largest buyer of Russian energy, spelled out plans to phase out the import of Russian oil, underlining how much the global energy market has changed since the conflict in Ukraine began.

“Putin must pay a price, a high price, for his brutal aggression,” European Commission President Ursula von der Leyen told the European Parliament in Strasbourg. “Today, we will propose to ban all Russian oil from Europe,” she said to applause in the chamber.

As part of the new sanctions, the EU plans to phase out supplies of Russian crude within six months, and refined products by the end of 2022. After the announcement, Brent crude, the international benchmark for oil, rose $3.32, or 3.16%, to $107.91 a barrel, by 10:30 a.m. GMT, while the U.S. benchmark West Texas Intermediate rose $3.44 to $105.80 a barrel by midmorning.

Although oil prices rose on the news, they didn’t come close to topping the $130-a-barrel price seen in early March, as analysts said the EU ban was anticipated and priced into forecasts. In fact, the rise barely offset Tuesday’s 2% drop, which occurred after China’s continued COVID-19 lockdown curtailed holiday travel and sparked fear of further depressed demand.

But while the EU’s announcement didn’t have major immediate effects, a ban on Russian oil would mean something much larger: the beginning of an end for Europe’s current energy makeup.  

“We’re going to see a structural change in the global oil market, really, in the form of Europe no longer being reliant on Russian energy,” Caroline Bain, chief commodities economist at London-based economic research firm Capital Economics, tells Fortune. “It is a permanent shift, not a temporary response.”

While such a shift might seem dramatic, Berenberg economist Holger Schmieding told CNBC that a phased-in ban on Russian oil imports “would not hurt European economies much.”

But that does not mean that an oil ban would be painless. An embargo on Russian oil is a “risky bet,” Simone Tagliapietra, a research fellow at the Bruegel think tank, told Bloomberg, because it could cause higher prices and expose Europe to “retaliation risks” if Russia were to cut Europe’s gas supplies in response.

That, economists argue, would almost certainly lead to gas rationing and a European recession.

High demand with no buyers

The EU currently buys half of Russia’s 4.7 billion barrels of daily oil exports. If today’s EU announcement becomes policy, Russia has few alternative countries to sell its energy to.

A quarter of Russian exports, or around 1.2 billion barrels of oil a day, goes to countries in the Commonwealth of the Independent States, a number of countries that were once in the Soviet Union. These are the only reliable buyers in Russia’s arsenal now, according to Bain.

Beyond the EU, other Western countries like the U.S., U.K., Canada, and Australia have all cut out Russian oil, although they did not buy much to begin with. “There are other large markets in Asia, like Japan and South Korea, that are U.S. allies that I don’t see very comfortable scooping up cheap Russian oil,” says Bain.

This leaves only China and India to buy up the remaining oil, which comes with much higher transport costs. Redirecting Russian oil by sea to China and India would require supertankers making weeks-long journeys from the Black Sea to the Mediterranean and then through the Suez Canal before reaching Asian ports. Even if prices were high enough to make such trips worthwhile, many shipping companies would likely shy away from the mammoth task for fear of being hit by sanctions.

In this context, one of the only remaining buyers—India—has been trying to negotiate deeper discounts on Russian oil, to be priced at less than $70 a barrel, according to Bloomberg.

And China, which is one of the few countries that has the capacity and demand to buy up the excess supply, might also be less than keen. “I don’t see China, either, going full absorbing all of Russia’s exports, because they don’t want to be reliant on somebody who has proved to be quite an unreliable supplier,” says Bain.

“Pivoting exports to Asia will take time and massive infrastructure investments that in the medium term will see Russia’s production and revenues drop precipitously,” Daria Melnik, senior analyst at Rystad Energy, said in a note on Monday.

And so, as the EU prepares to eliminate its use of Russia’s oil, the country must now figure out how to offset 2.5 billion barrels of oil a day. Capital Economics forecasts that the oil that would usually head to Europe will no longer find a home.

With the possibility of demand for Russia’s oil being destroyed, its biggest geopolitical lever may be at risk.

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