AP: On the brink of new restrictions - Europe's prospects without Russian diesel

Europe is taking another big step toward cutting its energy ties with Russia, banning imports of diesel fuel and other products made from crude oil in Russian refineries.

The European Union ban takes effect Feb. 5 following its embargo on coal and most oil from Russia. The 27-nation bloc is trying to sever its last uses of Russian energy and stop feeding the Kremlin’s war chest as the anniversary of the invasion of Ukraine nears.

The newest ban has risks: Diesel prices have already jumped since the war started on Feb. 24, and they could rise again for the fuel that is key to the global economy.

Most things people buy or eat are transported at some point by trucks, which mostly run on diesel. It also powers farm equipment, city buses and industrial equipment. The higher cost of diesel is built into the price of almost everything, helping push up inflation that has made life harder for people worldwide.

WILL THE EMBARGO PUSH UP DIESEL PRICES?

That depends. Diesel, like crude oil, is sold globally, and Europe could look for new sources, such as the U.S., India or countries in the Middle East. If that goes smoothly, the impact on prices might be temporary and modest.

Europe has already cut Russian diesel imports almost in half, from 50% of total imports before the war to 27%.

U.S. suppliers have stepped up shipments to record levels, from 34,000 barrels a day at the start of 2022 to 237,000 barrels per day so far in January, according to S&P Global.

The EU’s top energy official, Kadri Simson, says markets have had time to adjust after the ban was announced in June. Europeans also appear to have stocked up on Russian diesel before the deadline, with imports rising last month.

There is a complicating factor: The Group of Seven major democracies are talking about imposing a price cap on Russian diesel heading to other countries, just as they did on Russian crude. As with oil, the idea is to keep Russian diesel flowing to world markets but reduce Moscow’s revenue.

If the cap works as advertised, global diesel flows should reshuffle, with Europe finding new suppliers and Russian diesel finding new customers, without a major loss of supply.

But it’s hard to say how the cap will work without knowing where the price will be set and whether Russia will retaliate by withholding shipments.

WHAT COULD A DIESEL PRICE CAP ACCOMPLISH?

The hope is to reproduce the effect of the oil price cap, which barred Western companies that largely control shipping services from handling Russian crude priced above $60 a barrel.

Russia says it won’t sell oil to countries observing the price ceiling, but the cap and falling demand from a slowing global economy has meant customers in China, India and elsewhere can buy Russian oil at steep discounts, cutting into the Kremlin’s revenue.

WHAT HAPPENS IF DIESEL GETS MORE EXPENSIVE?

Fuel prices have been a major factor behind painful inflation in Europe that has robbed consumers of purchasing power and slowed the economy.

Diesel prices at the pump have swung from 1.66 euros per liter to 2.14 euros per liter in the course of a year.

“That is a gigantic increase,” said Christopher Schuldes, the third generation of his family to run German trucking company Schuldes Spedition.

The company has 27 diesel trucks and 50 employees in the small town of Alsbach-Haehnlein between Frankfurt and Heidelberg in southwest Germany. It already has cut fuel costs by equipping trucks with efficient engines, ensuring trucks leave fully loaded and training employees in fuel-efficient driving.

“We did all that a long time ago, long before Russia invaded Ukraine,” Schuldes said. “There’s no more room for optimization.”

Most European transport companies are now in a similar situation, so a diesel price hike will significantly increase ticket and transport prices.

WHAT COULD GO WRONG?

Energy markets are looking to China and wondering when the world’s second-largest economy will recover after the end of drastic COVID-19 restrictions. With low demand for fuel at home, the Chinese government let refineries ramp up their exports.

But if travel picks up in China, that diesel may disappear from the world market, raising prices as competition for fuel increases.

Source: AP