Guntram B. Wolff is the director of Bruegel, Brussels. Simone Tagliapietra and Georg Zachmann are Senior Fellows at Bruegel, Brussels.
The European Commission’s plan to target Russian oil in its latest sanctions package aims to increase pressure on Moscow.
Oil is a major source of hard currency for Russia, and since the introduction of financial sanctions it has become even more vital to the country’s economy, as well as a crucial source of funding for its war against Ukraine. .
More importantly, the proposed gradual introduction of an embargo on Russian oil could prove counterproductive – at least in the short term – and there is a better option.
Undoubtedly, one of the immediate consequences of the announcement of a progressive embargo will be an increase in prices; and as Russian oil sales to the European Union will continue for several months, this could very well boost Russia’s profits, giving a short-term boost to its government budget as the war rages on.
Furthermore, while phasing in would give Europe time to develop alternative oil supplies, it would also give Russia time to secure new export opportunities. And while measures to limit Russia’s access to shipping are an important part of the EU package, they may not be enough to deter alternative customers of Russian oil in an energy-hungry world.
Finally, a spike in prices following the announcement of the embargo will hamper the global recovery from the pandemic – which is why US Treasury Secretary Janet Yellen has called on the EU to be cautious in banning Russian oil.
Even at this late hour, the EU should consider taking a different course – that of an immediate punitive tariff on all Russian exports of crude oil, petroleum products and possibly natural gas.
A tariff would be a flexible tool to increase or reduce pressure on Russia, depending on the situation in Ukraine.
This would immediately reduce Russian revenues, while inducing Moscow to sell to Western buyers. As oil and gas would continue to flow, world prices could well fall, further reducing Russian profits. Finally, it would also give Russia less reason to quickly build new infrastructure to export fossil fuels to third countries.
The reason why the tariff option has been rejected so far is due to two misconceptions among European policymakers: first, that it would raise prices for consumers more than other alternatives, and second, that the Russian President Vladimir Putin would not accept it, choosing to shut down the oil and the gas flows immediately instead.
However, the effects of a tariff on prices depend on the ability of sellers and buyers to find alternatives. The harder it is for Russia to develop new export routes and the easier it is for the EU to find alternative oil supplies and reduce domestic demand, the more Russia will be willing to pay the tariff.
As infrastructure bottlenecks currently prevent any substantial redirection to Asia, Russian oil and gas exports to Europe are actually quite inelastic in the short to medium term. The EU therefore has a real chance of ensuring that tariffs are primarily paid by Russia rather than being passed on to EU consumers.
With a bold energy strategy, Europe could credibly threaten to cut Russia’s oil and gas revenues, while minimizing the domestic economic consequences of a tariff. And to improve its position, the EU should aim to reduce demand for oil and gas across the bloc, while increasing the use of all available alternative energy resources.
Of course, reducing the demand for oil and gas will go through the end of subsidies and will encourage citizens to consume less. Such measures are politically difficult, but they are now urgent.
In fact, government responses to energy price increases have been mostly counterproductive, increasing the EU’s dependence on Russia rather than reducing it. Direct energy price subsidies and tax cuts have supported oil and gas consumption. Initially designed to provide a quick fix to what was supposed to be a temporary problem, these measures have now exploded and become structural.
European governments must recognize that rising energy prices are not the problem but are part of the solution, and that reducing demand for oil and gas is crucial to increasing our energy resilience.
Europe must replenish its gas reserves before next winter to avoid Putin’s energy blackmail, and every cubic meter of unconsumed gas now counts. Governments should have the courage to tell their citizens that Europe is in the midst of perhaps the greatest energy crisis in its history.
According to the International Energy Agency, simple actions such as lowering the thermostat or increasing the air conditioning by just 1°C, working from home when possible or reducing highway cruising speed by 10 km/h could save enough oil to refuel. 120 super tankers and enough natural gas to heat 20 million homes.
Compared to difficult and costly supply-side options, such as finding substantial additional volumes of LNG, demand-side options like these could be a big and quick win.
And as for triggering Putin’s retaliation with a tariff, it could well happen – the recent cut in supplies to Poland and Bulgaria shows that this possibility should not be ruled out. However, the proposed phasing in of an oil embargo would only increase the likelihood of such a supply cut even further – and is clearly Europe’s worst option.