Oil Politics and Europe: The West in Conundrum?


The Russia-Ukraine war has drastically altered the dynamics of world politics ranging from the economic supply chain to the geopolitical rivalry among the great powers at all levels. After the war had broken out on Feb. 24, 2022, the Western world particularly, the United States and European Union imposed high volumes of economic sanctions on Russia as a punishment for the war. Over time, the sanctions have been augmented to a grave degree that consequently crippled and thwarted the economic stability of Russia which also brought about a spillover effect on the economic resilience throughout the world.

By contrast, Vladimir Putin played a shrewd card game against the West with its trump cards: oil and gas. To be mentioned particularly, Russia is the primary exporter of crude oil and refined oil products such as gasoline and diesel where it exports about 5 million barrels of crude oil and 3 million barrels of oil products per day. These volumes of exports meet approximately 40% of the total revenues of Russia. Moreover, Russia is also a crucial member of OPEC Plus which bloc, in the global oil market, is the largest oil producer and exporter. In this respect, the politics of oil led by the West, Russia, and OPEC Plus have been one of the major conundrums that resulted in an energy quandary throughout the world.

In this regard, the trajectory of Saudi oil politics amidst the Ukraine war has also marked a very intriguing development. Saudi Arabia, the leader of the OPEC Plus, which was once reckoned as one of the core allies of the U S. and the West has shown no sympathy about increasing oil production for meeting their lofty needs. The country is now mostly following its self-interests going out of the canopy of the U.S. influence and doesn’t care about the consequences to any extent. Among the top three oil-producing countries, according to the EIA estimation in 2021, Saudi Arabia stands in the second position with the production of 10.8 million barrels of oil per day, only behind the US.

With such a huge volume of oil production, Saudi Arabia’s antagonism towards the demands of the U.S. is highly concerning for the West. Besides, winter is knocking at the door in Europe which might make European countries more vulnerable to high demands for oil and gas. In contrast, the recently adopted $60 price cap by the EU on Russian oil will also bring about adversity in the policy formulation of Russia that might impact the countries, although the decision has been taken with a view to thwarting the overall revenue of Russia earning from oil and gas.

Oil Producing Blocs and Countries: Contributions and Significance

Before mulling over the details explication, let us have a glimpse at the diverse significance and contribution of the oil blocs to the world energy market. Per the estimation of 2021, the aggregated oil production throughout the world was 89.9 million bpd in which, by region, the estimated oil production of the Middle East countries is positioned at the top. The region contributes 28.1 million bpd while, among the high-producing regions, the North American region produces 23.9 million bpd, the Asia Pacific region produces 7.3 million bpd and the African region produces 7.2 million barrels per day. In this regard, the contributions of South America and Europe are also highly significant while the Latin American region produces 5.9 million bpd, Europe does 3.4 million bpd. From an organizational perspective, OPEC holds the largest portion of oil production estimated at 31.7 million bpd which is approximately 35 percent of the total oil production around the world. Likewise, the estimation of the oil production of the Commonwealth of Independent States (CIS) is around 13.8 million bpd.

Particularly talking about Russian oil production, being the third-largest oil producer in the world behind the U.S. and Saudi Arabia, Russia now produces around 11.3 million barrels of oil per day which accounts for more than 12% of total oil production all over the world. Due to such huge contributions and market incentives, Europe is extremely dependent on Russian energy. Russia accounts for approximately 40% of the oil and natural gas consumption of the EU countries. However, the five of the top ten oil-producing countries are from the Middle East region and OPEC which are responsible for 27% of total oil production in the world. Furthermore, it is discerned that, according to the Observatory of Economic Complexity (OEC- 2020), Saudi Arabia being the world’s largest crude petroleum exporter, makes nearly $95.7 billion by exporting crude petroleum. In this respect, in 2020, the US and Canada earned $52.3 billion and $47.2 billion respectively while being the second largest supplier and a crucial member of OPEC Plus, Russia earned $74.4 billion from the world energy market. Therefore, as Europe is undeniably dependent on Middle Eastern and Russian energy, it has now become more complicated for them to manage the dynamics of oil politics after the ban on Russian oil had been exerted and Saudi Arabia began following the adversity.

The Recent Price Cap on Russian oil and its Objectives 

Recently, the grave ban on Russian oil by the EU came into force on Dec. 5 through the Group of Seven (G7) and Australia’s approval of a $60-per-barrel price cap on petroleum products and seaborne oil of Russia. While the majority of the Western countries without the EU had been imposing sanctions on the Russian energy sector since March last year, the European Union took nearly six months to discuss the conflicting issues regarding the oil ban. The Ukrainian President has long been criticizing Europe for not exerting concrete decisions to weaken the Russian economy. However, the recent ban on oil is the first in a series of bans and subsequently, the petroleum products will also be banned in February 2023. However, it is argued that the price cap has been addressed as a safety valve against the severe outcomes of banning Russian oil in the global market. With the three major objectives – controlling volatility in oil prices; ensuring the flawless supply of Russian petroleum products outside of the EU market for fulfilling the needs of developing countries, and importantly, thwarting the revenues of Russia from energy sales – the price cap has overtly been exploited with political intention. However, Russia rejected the $60 oil price cap and warned the Western countries of serious responses.

Who Will Gain and Who Will Lose?

Although it is argued that the $60 price cap has been introduced as a “safety valve” against the drastic outcome of banning Russian oil in the global market, it is crystal clear that this is nothing but a politics which aims to thwart the revenue earning of Russia from energy sales. Volodymyr Zelensky argued that this price cap is quite comfortable for Russia and it would be lowered more. However, Russia wholeheartedly repudiated the price cap and there are several reasons behind this antagonism. It seems that Russia will lose not a big amount of its revenue every month due to the ‘comfortable’ price cap but Russia will endure a considerable loss in the total aggregation of its revenues. For days, Russia has been shipping around 1.7 million bpd to Europe. Intriguingly, it will be very tough for Moscow to alternate this huge amount of oil market with another place.

In this regard, Russia have no other room to consider selling outside the EU and had to sell and comply with the decision which would be harsh for Moscow. Moreover, Russia will also lose a million and a half barrels of oil per day to the logistical crux since it lacks sufficient ships and pipelines to draw away the erstwhile exports. As a result, Russia will forfeit volumes, although it receives a price presently. Besides, the geopolitical dynamics are also getting denser in this respect. The decision of the Saudi-led OPEC regarding the ramping up of oil production to supplant the missing 1.5 million barrels of Russian oil in the global market will be another crucial factor of oil politics, although OPEC has not delivered any statement yet. If OPEC does not ramp up production, the Brent-decided oil price should go to even $100 per barrel. With such a price, even with a discount price, Russia would make more money than the current price cap. By contrast, it will still lose in terms of export volumes and this politics has shrewdly been played out by the West to impede the investment of Russia in war.

What Is the Future Trajectory?

The future trajectory of oil politics among the U.S., the EU, OPEC, and Russia portends a very conflictual outlook that might spur the energy crisis to a critical degree where the developing countries will be scapegoats of the upshots. However, the European countries will continue pushing OPEC to expand its oil production but it is unlikely that Saudi Arabia will trace the course. Alternatively, Western countries are also trying to import more oil from West Asian and West African countries to meet their extreme needs but there are some issues with pipelines and transportation. Texas Oil Production in the US can also be another alternative to Europe’s demands but the question is whether the US will heighten the production. However, Europe is now entangled with two-folded problems: the first, Saudi-led OPEC is averse to augmenting production, and as a result, they cannot but continue buying Russian oil with sound price and the second, winter will penetrate the region in a vulnerable situation where Russia will relish the advantage of its resources. Likewise, Russia will also undergo the delicate oil politics led by Europe and G-7, although it has still the big markets of China, India, and Turkey in its hands. After all, whatever the trajectory is, let us get the developing countries free from any woes.

[Photo by Eric Kounce, via Wikimedia Commons]

– Kawsar Uddin Mahmud is a Research Intern at the KRF Center for Bangladesh and Global Affairs (CBGA).

Published in The Geopolitics [Link] and Modern Diplomacy [Link]