Russia has said it may close its main gas pipeline to Germany if the West goes ahead with its decision to ban Russian oil.
Deputy Russian Prime Minister, Alexander Novak, suggested that a “rejection of Russian oil would lead to catastrophic consequences for the global market”, which could cause prices to more than double to $300 a barrel.
The US has been exploring a potential ban with allies as a way of punishing Russia for the ongoing invasion of Ukraine. But Germany and the Netherlands rejected the plan on Monday, March 7, 2022.
The European Union (EU) gets about 40% of its gas and 30% of its oil from Russia. This means that the EU will have no easy substitutes if supplies are disrupted.
While the United Kingdom (UK) would not be directly impacted by supply disruption, as it imports less than 5% of gas from Russia, it would rather be affected by price hikes in the global markets when demand in Europe increases.
Iain Conn, the former boss of British Gas owner, Centrica, said natural gas is “less freely” traded compared to oil, hence, it would be “much more difficult” to replace Russian gas if supplies are affected. This is because the gas is transported through fixed pipelines from country to country.
In an address on Russian state television, Mr. Novak stated that it would be “impossible to quickly find a replacement for Russian oil on the European market”.
“It will take years, and it will still be much more expensive for European consumers. Ultimately, they will be hurt the worst by this outcome.”
Deputy Russian Prime Minister, Alexander Novak
Pointing to Germany’s decision last month (February) to freeze certification of Nord Stream 2, a new gas pipeline connecting the two countries (Russia and Germany), he added that an oil embargo could prompt retaliation.
“We have every right to take a matching decision and impose an embargo on gas pumping through the [existing] Nord Stream 1 gas pipeline.”
Deputy Russian Prime Minister, Alexander Novak
Russia is the world’s second-largest gas producer and third-largest oil exporter, hence, any move to impose sanctions on the Russian energy industry could badly damage economies.
The view of Experts on the West’s proposal
Head of Oil and Gas Research at Investec, Nathan Piper, said although imposing sanctions on Russia’s oil and gas exports was attractive, “practically it is challenging”.
He disclosed that both the global oil and gas markets were tight ahead of the war in Ukraine “with limited spare capacity to replace any disrupted Russian volumes”.
“The question is now whether US and European leaders are prepared to endure high oil and gas prices to add energy exports to the sanctions list. The threat of this action is almost the worst of both worlds, forcing prices up but doing nothing to limit Russian volumes or the revenues flowing to Moscow.”
Head of Oil and Gas Research at Investec, Nathan Piper
Analysts at Capital Economics have forecasted that oil prices could rise to $160 per barrel, from its current price ($128.8 per barrel), should the West impose sanctions on Russian exports. However, David Oxley, Senior Global Economist at the consultancy, disclosed that it was disruption to Russian gas that would hit countries harder, describing it as a “completely different kettle of fish”.
Oxley also mentioned that energy-intensive industries across Europe could be hit, with “vast swathes of heavy industry being switched off” as it is much harder finding replacement gas suppliers compared with oil.
EU countries heavily reliant on Russian gas, such as Germany, could switch from gas to coal, Oxley stated, but that would run counter to the bloc’s climate ambitions preventing it from being a long-lasting solution.
