GT Voice: EU embargo against Russian oil set to bring chaos to global market
Published: May 31, 2022 09:45 PM
File Photo: CFP

File Photo: CFP

EU leaders on Monday agreed "in principle" to embargo 90 percent of Russian oil imports to the bloc by the end of this year, Reuters reported. While the move is sufficient to demonstrate the EU's resolve to wean itself off energy supplies from Russia, the market may be more concerned about how high the reported embargo will push oil prices and what are the potential consequences to the world economic order. 

Global oil benchmarks surged to two-month highs on Tuesday. The Brent crude futures contract for July rose 1.2 percent to $123.22 a barrel, the highest level since early March, while US West Texas Intermediate crude futures jumped up 3.2 percent to $118.80 a barrel.

If anything, this may be just the beginning of a major change in the market pattern for global energy supply, because the volume of oil trade affected by the reported embargo will be enormous. Russia is one of the world's largest oil exporters, accounting for about 8 percent of global oil supply, while the EU, the world's second-largest oil importer, is the biggest buyer of Russian oil. If oil trade between the EU and Russia is banned, some economists estimate there will be a supply gap of nearly 3 million barrels of crude oil per day.

In fact, such politically motivated oil embargo seems a bit ahead of its time for the EU economy and is likely to hit the bloc harder than Russia. This is because if there is no fundamental change seen in oil supply and demand structure in the short term, oil embargo will only push up international oil prices to higher levels, which may partly offset the financial shocks of reduced oil exports for Russia.

As for the EU, it is understandably hard for the bloc to find an alternative source of Russian oil either in the short term or at a low price. As a result, EU member countries are bound to suffer from high oil prices and high inflation in the short term. Moreover, given the fragility of Europe's energy supply structure exposed in last year's energy crisis, the politicization of energy sources could exacerbate the region's energy shortage, which could become a key constraint on the EU industrial development for a long time to come.

It should be noted that the US is a major driving force behind EU's embargo. After the US announced a ban on Russian oil in March, some EU countries refused to follow. But they generally changed the stance over the past months due to US pressure.

On the surface, the US is trying to suppress Russia to the corner by exerting unprecedented financial pressure on its economy. But from a deeper strategic point of view, the US push behind the Western oil embargo is not just about fermenting chaos in the global energy market, but also aimed at overturning the old pattern of global energy supply and breaking up the relevant trade and financial networks where Russia holds a significant share. Because only by reshuffling the old systems can the US achieve its strategic goal of kicking Russia out, thus consolidating its hegemonic power in the world. The EU is just a tool the US uses to achieve its goal.

This is also a process for American capital to maximize their own benefit. While US oil producers are set to benefit a lot from the upcoming change in global oil supply, Wall Street banks are also profiting from the market turbulence by betting big on oil companies. For instance, Warren Buffett's Berkshire Hathaway has recently boosted its stake in oil giant Chevron to $26 billion, up from $4.5 billion at the beginning of the year, according to media reports. None of this is a coincidence.