On Monday Russian Deputy Prime Minister Alexander Novak told reporters that the West’s decision to ban imports of Russian oil will lead to catastrophic consequences for the world market, adding that the price “may exceed $300 per barrel.”
"It is absolutely obvious that abandoning Russian oil will lead to catastrophic consequences for the world market. A surge in prices will be unpredictable - more than $300 per barrel, if not more," he said.
Novak noted that Russia is the largest supplier of oil to Europe, which consumes about 500 million tonnes of oil, of which Russia supplies about 150 million tonnes, or 30%. Russia also supplies the EU with another 80 million tonnes of oil products.
"Moreover, everyone knows that the supply of oil and oil products from Russia today is the most competitive for the European market, given the developed oil pipeline infrastructure and the logistics of sea deliveries," the Deputy Prime Minister stressed.
The possibility that the United States might ban Russian oil imports has triggered a surge in Brent crude to almost $140 a barrel, before settling at $125; its highest level since 2008.
Impact on India
India is the world's third-largest importer of crude oil, and rising prices push up the country's trade and current account deficit, while hurting its currency and fuelling inflation.
Economic Times reported that Credit Suisse (CS) has cut its rating for the Indian market to 'underweight' as it feels India is the most vulnerable to oil price hikes in Asia.
"We use the funds freed from India to raise China from Market Weight to Overweight. China’s credit intensity still clouds long-term prospects but we like the country’s low oil import bill, insulation from Fed rate hikes, improving macro indicators and wealth of potential policy tools," CS said.
The impact of the war in Ukraine on global supply chains could force India’s central bank to raise its inflation forecast, but may leave little scope for it to tighten monetary policy amid a deteriorating global growth outlook.
Costlier crude could also widen the deficit in the nation’s current-account, the broadest measure of trade, and weigh on the rupee, which already declined to a record low on Monday.
So what will this mean for the average Indian consumer?
On Tuesday, petrol prices per liter in the four metro cities were: ₹95.41 in Delhi, ₹109.98 in Mumbai, ₹101.40 in Chennai and ₹104.67 in Kolkata.
These prices are largely unchanged since early February, when oil was trading at below $100/barrel. So the impact of oil prices tripling since then would undoubtedly lead to a major spike in the prices paid by consumers at the pump.
Fortunately, despite the rhetoric emanating from the West, an oil embargo on Russia remains unlikely for now.
Will the West ban Russian oil imports?
On Monday, German Chancellor Olaf Scholz pushed back hard against calls from the U.S. and Ukraine for a ban on imports of Russian gas and oil as part of international sanctions on Moscow.
"Europe has deliberately exempted energy supplies from Russia from sanctions," Scholz said in a statement. "At the moment, Europe's supply of energy for heat generation, mobility, power supply and industry cannot be secured in any other way. It is therefore of essential importance for the provision of public services and the daily lives of our citizens," he added.
However, on Tuesday, the European Union (EU) said that it could cut most of its reliance on Russian gas by the end of this year if governments implement a raft of emergency measures to be proposed by the European Commission.
For that to happen, member countries need to accelerate the flagship emissions-cutting Green Deal policy, aimed at making the bloc climate neutral by 2050 — a policy that's already caused political tensions.
Moscow has cards left to play
With world powers currently trying to renegotiate the Iran nuclear deal (known as the JCPOA), there is the possibility that Iranian crude could re-enter global energy markets and thereby alleviate some of the pressure. However, Russia is one of those very global powers that has a seat at the table at the negotiations.
Moscow is introducing last-minute demands that could scuttle an international nuclear deal with Iran — and the timing is unlikely to be coincidental as the Kremlin frets about the growing threat to its critical oil revenue after its invasion of Ukraine.
Iran produced 2.4 million barrels of crude oil per day on average in 2021, and plans to increase that to 3.8 million barrels if restrictions are lifted. The return of Iranian supplies would help offset market turmoil and price spikes if the West were to ramp up its sanctions against Moscow over the war in Ukraine and ban Russian crude sales.
Oil sales are critical to Russia’s budget. Although Western countries have not yet directly targeted oil and gas, they have said they are prepared to do so and many oil traders have already started imposing an effective embargo.
But despite pressure from the US, such a ban is unlikely. European leaders have already poured cold water on the idea - so Russia's counter-threat carries relatively little weight.
And then there's the fact that Russia is still making huge sums from sales of oil and gas to Europe every day, helping to fund its war.
Moscow has everything to gain from exploiting traders' nerves to push up energy prices; but a great deal to lose if it were to carry out its threat.
