“It will be significant for Russia”, warns on franceinfo Patrice Geoffron, professor of economics at Paris Dauphine University and director of the center for the geopolitics of energy and raw materials. The leaders of the 27 EU countries agreed on Monday May 30 to reduce their imports of Russian oil by 90% by the end of the year. The agreement provides for a temporary exemption to transport Russian oil by pipeline in order to lift Hungary’s veto.
franceinfo: What specialist view do you have on this agreement?
Patrick Geoffron: First, it can be observed that the negotiations took time. In fact, arriving at the 6th package of sanctions is more complicated than for the 5th insofar as, on energy issues, there is a gradation. Agreeing on coal issues had been quite simple since coal exchanges with Russia weigh little while this is not the case for oil. For oil, if we globalize, we are at about 3 million barrels per day at 100 dollars per barrel, this gives an idea of daily import flows. And then there is a specific issue in certain landlocked areas, such as Hungary or Slovakia with delivery problems which are real but which obviously have been exploited by Viktor Orban, which explains some of the difficulties in concluding a deal.
Will this cut off a huge source of funding from Russia’s war machine?
About 300 million euros or dollars a day. It will be significant for Russia. And contrary to popular belief, Russia will have difficulty selling its oil elsewhere. She will have to sell it at knockdown prices. For example, for sales to India, oil instead of being sold at 120 dollars a barrel today, the discount will be 30 to 35% compared to this market price. There will therefore be consequences for Russia: both on the prices of these barrels and both on the quantities that can be sold, in much smaller volumes than has been the case until now.
What are the Europeans going to do, what alternatives do they have?
Complex issue, especially on processed products such as diesel, a very sensitive issue in France. Oil is not a homogeneous raw material, there are several types of quality and not all refineries in Europe are suitable for importing oil of a quality different from that of Russian oil. But the characteristic of oil in general is that it is transported much more easily than gas. It is transported by boat, over long distances. We will therefore be able to find other sources of supply, particularly from the Middle East. But at the end of the day, and this is a European point of tension, higher supply prices and therefore higher prices at the pump.
This impact of prices at the pump, can we estimate it?
We live in a regime in which prices are around 2 euros in France, which could seem explosive in terms of social tensions some time ago. It is probably at this level that oil prices could hang in the future. With some uncertainties, especially on the Asian side. What happens in China will influence demand. Another supply-side element with the expanded Organization of the Petroleum Exporting Countries (OPEC): Saudi Arabia, Russia and their allies will vary production in the future. If production were to increase, if Iran came back to the market then we could have a relaxation. But oil prices below $100 as was normal before the Covid crisis are probably behind us. We must be prepared to live in an environment of higher prices.