Europe is taking another big step toward cutting its energy ties with Russia, banning imports of diesel fuel and other products made from crude oil in Russian refineries.
The European Union ban takes effect February 5 following its embargo on coal and most oil from Russia. The 27-nation bloc is trying to sever its last uses of Russian energy and stop feeding the Kremlin's war chest as the anniversary of the invasion of Ukraine nears.
The newest ban has risks: Diesel prices have already jumped since the war started on February 24, and they could rise again for the fuel that is key to the global economy.
“We're leaving money on the road to provide our services,” said Hans-Dieter Sedelmeier of the family-run German bus and travel company Rast Reisen.
Most things people buy or eat are transported at some point by trucks, which mostly run on diesel. It also powers farm equipment, city buses and industrial equipment. The higher cost of diesel is built into the price of almost everything, helping push up inflation that has made life harder for people worldwide.
Here are key facts about the upcoming European embargo:
Will the embargo push up diesel prices?
That depends. Diesel, like crude oil, is sold globally, and Europe could look for new sources, such as the US, India or countries in the Middle East. If that goes smoothly, the impact on prices might be temporary and modest.
Europe has already cut Russian diesel imports almost in half, from 50 per cent of total imports before the war to 27 per cent.
US suppliers have stepped up supplies to record levels, from 34,000 barrels a day at the start of 2022 to 237,000 barrels per day so far in January, according to S&P Global.
The EU's top energy official, Kadri Simson, says markets have had time to adjust after the ban was announced in June. Europeans also appear to have stocked up on Russian diesel before the deadline, with imports rising last month.
There is a complicating factor: The Group of Seven major democracies are talking about imposing a price cap on Russian diesel heading to other countries, just as they did on Russian crude. As with oil, the idea is to keep Russian diesel flowing to world markets but reduce Moscow's revenue.
If the cap works as advertised, global diesel flows should reshuffle, with Europe finding new suppliers and Russian diesel finding new customers, without a major loss of supply.
But it's hard to say how the cap will work without knowing where the price will be set and whether Russia will retaliate by withholding shipments.
“When Russian exports are constrained, for whatever reason, that would of course cause some trouble in this whole reshuffle process," said Hedi Grati, head of fuels and refining research for Europe at S&P Global Commodity Insights. “Europe would be competing with other big importers, and that would cause upward pressure on pricing.”
If the cap doesn't block large amounts of Russian diesel, there might be “a short-lived price spike” as the market adjusts. For one, tankers would have a longer journey to Europe from the US, Middle East or India than from Russia's Baltic Sea ports, stressing shipping capacity.
But massive new refining capacity is launching in Kuwait and Saudi Arabia later this year and in Oman in 2024. That “could further alleviate any pressure points from this divorce from Russia,” Grati said.
