Energy supplies have been lifted from sanctions, German Chancellor Scholz announced on March 7. The decision was probably taken after gas prices reached a record $3,700 per thousand cubic meters at the moment, which is 15 times more than the “fair” long-term gas price in the previous realities. Following Scholz, a similar position was expressed by the Prime Minister of the Netherlands Rutte. In the face of a sharp rise in prices, it was decided to try to cool the situation. But in the medium term, the risks of an embargo by Western countries remain, and this applies primarily to oil, not gas. Recall that after the aggravation of the international situation, the situation in the oil and gas markets for Russia looked somewhat different.
Global oil prices, of course, immediately began to rise, but at the same time, part of Russian supplies began to be carried out at a significant discount, over $20 per barrel. In the face of potential sanctions uncertainty, companies were afraid to participate in deals with Russian supplies without an additional premium. Now we can expect a decrease in this discount against the background of statements by European officials.
But the risks remain: if we take into account the issues of logistics and adjustment of European refineries for new types of oil (all this will take time), then it is possible to replace oil supplies from Russia. In terms of global balance, Russia exports (through oil and oil products) about seven percent of global oil consumption. Of these, about a third goes to Asia, mainly to China. Probably for part of continental pipeline supplies and Europeit will be difficult to abandon Russian oil because of the logistics. That is, far from all volumes may fall under hypothetical sanctions, but, say, two to four percent of global consumption. This is still an acceptable shorthand for the global economy. And prices, of course, will rise sharply, which will reduce global demand. And somewhere the boycott factor will also work: Shell has already announced its refusal to buy spot shipments of Russian oil.
With gas, the situation is almost the opposite of the situation with oil. First, the fuel is supplied almost entirely through gas pipelines. With the exception of LNG from Yamal, and there, by the way, the risk of tanker deliveries has already manifested itself: in the UK, the dockers refused to unload a gas carrier from Yamal. Europe’s dependence on Russia for gas is 30-40 percent, and even in the medium term it is impossible to replace Russian imports. Despite the development of the LNG sector, the gas market remains much less global than the oil market. As we all remember, in recent months Gazprom has sharply reduced supplies to the EU. And pumping through Ukrainewas until recently two times lower than the minimum contract. But with the start of the special operation, transit through Ukraine, on the contrary, grew to a contractual volume of 109 million cubic meters per day, in addition, Gazprom is gradually returning to booking part of the volumes along the Polish Yamal-Europe route. That is, Russian exports have even increased now, however, against this background, prices have also increased.
The reasons are clear: one should not underestimate the long undersupply by Gazprom in recent months, which has already had a cumulative effect. It was expected that the deficit in storage could be compensated for in the summer, but now uncertainties have increased. It should be reminded that scheduled injection into gas storage facilities starts immediately after the end of the heating season, there is no break here.
Curiously, against this background, Ukraine itself imposed a ban on gas exports. This does not apply to transit, but affected those traders who stored their gas in Ukraine with plans to sell it to EU countries in the future. Judging by the data of the Ukrainian gas transmission operator, the country is still making small reverse deliveries to its territory.
And in these circumstances – a critical dependence on gas compared to “possible options” for oil – the first hints of Russian officials have already appeared in favor of the fact that oil and gas supplies can only be carried out “as a set” and it will not be possible to buy gas without oil.
It is worth noting here that historically, foreign exchange earnings from the sale of gas amounted to about ten percent of the foreign exchange earnings of oil and oil products. But now, when the price of oil has risen one and a half to two times from the “norm”, and gas prices are 5-15 times higher (quotations are jumping), gas revenues for our country are becoming significant. So if earlier gas was rather “politics”, and oil – “income”, now the situation has changed.
Finally, in these circumstances, another sector, partly related to energy, is of particular importance: fertilizers. It is even less significant in volume, but for obvious reasons even more critical for the global economy. Here, even without the current destabilization, there was an increase in quotations. For example, prices for diammonium phosphate have tripled over the past two years. As you know, plants need three main macronutrients: potassium, phosphorus and nitrogen. But for manufacturers, there is a significant difference between them. Sources of potassium and phosphorus are minerals that, after chemical treatments or transformations, become commercial fertilizers. On the contrary, the production of nitrogen fertilizers is completely based on natural gas, and the nitrogen itself is taken from the air. It should also be noted that often fertilizers are mixed. For instance,
Accordingly, the cost of nitrogen fertilizers is fully correlated with gas prices. The proportion, by the way, is very simple: it takes a thousand cubic meters of natural gas to produce a ton of ammonia. It should be reminded that fertilizer plants were already shut down in Europe in autumn, when the prices for ammonia and its derivatives did not keep pace with the rapidly rising prices for natural gas. Under such conditions, it was simply unprofitable to produce this product.
Either way, Russia accounts for 15 percent of global fertilizer exports. Our country exports all types of fertilizers. An even greater role in potash fertilizers: Russia, Canada and Belarus (in comparable shares) account for the bulk of the entire world production of this product. China, by the way, is also an exporter of nitrogen and phosphorus fertilizers, and in the fall it already limited export supplies, but imports potash fertilizers.
Curiously, a few days ago, the Ministry of Industry and Trade recommended that Russian producers temporarily suspend export shipments of fertilizers due to disruption of supply chains by foreign logistics companies. This news was then interpreted as an attempt to persuade foreign logistics companies to stable cooperation in other industries.
But in any case, the fertilizer sector, already in short supply in recent years, is even more sensitive to possible shortages compared to the same oil.
Let’s summarize. Oil is, first of all, an opportunity to move comfortably and without restrictions. Gas is access to heating and hot water, electricity generation, and the operation of industrial enterprises.
The proportions here depend on the energy mix of a particular country, but in Europe the demand for gas is distributed between these three sectors approximately equally. Fertilizers are ultimately food.
Beyond the scope of our consideration were other – relatively small – sectors where Russia is difficult to replace. For example, nickel prices have increased 2.5 times over the past two days (and quadrupled since the beginning of the year). Russia accounts for ten percent of world nickel production. Global food prices are rising.
That is, the sectors that are less critical for the volume of Russia’s foreign exchange earnings turn out to be simultaneously more important for the global economy.
In the event of a possible embargo on oil purchases, our country has a fork in the road: to sell at least some of what is being bought, or, in the event of a possible embargo, to sell oil “in load” to more critical commodities. Or just for some countries to hold on to one or another scarce product.
For the sake of objectivity, one cannot fail to say that our country is also highly dependent on the supply of a wide range of products, which again occupies a small share in the total volume of foreign trade operations, but further domestic production and the functioning of critical industries depend on it. This will also have to be taken into account when setting up mutual restrictions on trade, if they do appear.
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