G7 AND EU CAP ON RUSSIAN DIESEL

6th February, 2023 International Relations

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Context: The European Union has joined the United States and the United Kingdom in banning imports of Russian diesel and other refined oil products, as it looks to end its energy ties with Moscow which for years had been its biggest source of energy.

Details:

Need:

The ban is coupled with a price cap on Russian refined fuel, aimed at hurting Russian revenue while ensuring the EU fuel embargo doesn’t end up driving up global diesel prices which are already high.

Background:

The oil products embargo comes two months after a similar ban on Russian crude oil brought in by sea — both announced in June as part of the EU’s sixth sanctions package against Russia in response to Moscow’s “brutal and unprovoked attack on Ukraine.”
While the crude oil embargo and the oil price cap which came into effect on December 5 passed off without any major disruption, the ban on refined fuels — in particular, diesel with its wide industrial and domestic usage — has pushed the market into uncertainty amid historically low diesel stocks in Europe.
The crude is more fungible. It’s much more difficult to produce diesel/gasoil whereas, for crude oil, the upstream production is much more varied on a global scale. There’s a lot more kind of crude in the market and there potentially is diesel/gasoil.

Will the ban drive up diesel prices?

That would largely depend on how successful the European countries are in finding alternative sellers to help fill up the void caused by the ban and how effective Moscow is in finding new markets for its fuel shunned by the EU.
If those two things happen, then the impact on supply and prices would be muted and short-lived.
If not, then the sanction could lead to major disruptions in diesel-reliant industries such as transportation and agriculture, with fuel price rises further undermining the fight against inflation.
The perceived disruption is already driving up diesel prices, which already have been stubbornly high over the past year and a half.
While the situation has improved in recent months due to a mild winter, diesel stocks remain at uncomfortable levels.
Diesel prices could climb further in the short term to reflect an increase in shipping costs as supplies would now need to come from regions further afield, higher production costs in countries such as the US and the risk premium.

Who could the EU turn to for diesel?

The EU relied on Russia for nearly half its diesel needs before Russia’s invasion of Ukraine
That share dropped over the past year but remained significant with EU members buying in excess of 200 million barrels of diesel last year.
The ban has left the EU with a void of about 600,000 barrels of diesel and related oil products per day, a gap that the EU intends to plug with increased supplies from the Middle East, Asia and the US.
With its own refining capacity under duress, the EU has already been relying on those regions over the past months to make up for the shortfall.
The bloc could also benefit from so-called washing, wherein Russian diesel would be blended with other non-Russian products in countries such as Turkey and re-exported back into Europe.

Implications for China and India:

India and China, which have emerged as the biggest buyers of Russian crude oil in the last 12 months, could play a big role in shoring up the EU’s diesel stocks.
India’s diesel exports to Europe have soared since the invasion as refiners take advantage of low feedstock costs thanks to steeply discounted Russian crude and high diesel prices.
China has raised its first batch of 2023 export quotas for diesel and other refined oil products, exports of which have surged in recent months. The move is expected to keep its diesel exports at record levels, which could potentially help push barrels from other producers westward into Europe.

Where will Russia sell its diesel?

Russia has managed to keep its crude oil flowing, largely with support from India and China, who have snapped up the oil shunned by Moscow’s traditional European buyers at huge discounts.
However, rerouting its diesel away from its largest market could be more challenging in the absence of a ready market for Russian fuel.
Experts expect Russian diesel earlier sold to Europe to be diverted to Turkey and countries in Latin America and Africa.

What would be the impact of the diesel price cap?

The price cap is meant to ensure that Russian diesel and other oil products can still be sold to third countries and prevent any massive spike in prices following the EU ban.
The mechanism would allow European insurance and shipping firms to continue offering their services to shippers carrying Russian oil products to other regions as long as the fuel is purchased at or below an agreed cap level.
The oil products price cap would have minimal impact on Russian refining crude runs and distillate exports

Group of Seven (G7)

G-7 is an inter-governmental political forum consisting of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.
- The European Union is a 'non-enumerated member.
G-7 members are;
- The advanced economies and liberal democracies.
- They shared values of pluralism and representative government
G7 represents58% of the global net wealth ($317 trillion), more than 46% of the global gross domestic product (GDP) based on nominal values, and more than 32% of the global GDP based on purchasing power parity.
As of 2022, G-7 countries make up 10% of the world’s population, 31% of global GDP, and 21% of global carbon dioxide emissions.
Most G-7 countries had a high level of gross debt, especially Japan (263% of GDP), Italy (151%) and the US (133%).
The heads of government of the member states, as well as the representatives of the European Union, meet at the annual G7 Summit.
Germany holds the presidency of the G7 in 2022.
- Japan will be president in 2023.

About EU:

European Union is an international organisation consisting of European Countries, which was formed in 1993.
It came into force after the signing of the Maastricht Treatyby 28 countries.
The Maastricht Treaty is also known as the Treaty of the European Union (TEU).
Members of the EU: 27. UK made an exit from the EU on 31st January 2020
European Union has 24 official languages
Euro is the official currency for 19 of the 27 EU member countries
The objectives of forming the European Union are:
To increase political cooperation
To enhance economic integration by creating a single currency the EURO.
Unified security and foreign policy
Common citizenship Rights
Enhanced cooperation in the areas of judiciary, immigration and asylum.
European Union was awarded the Nobel Prize for Peace in 2012.