EU Plans To Ban Russian Oil Could Wipe Out 1/3 Of EU's GDP

Summary

• Increasingly dangerous ideas are gaining traction in the Western World, as the financial sanctions on Russia seem to have a somewhat limited impact, with the ruble recovering above pre-war levels recently.
• Various forms of total sanctions on Russia's energy exports are now being floated, including an EU ban on Russian oil.
• Within the context of an already tight global commodities market situation, there is every chance that such a scheme will plunge the world into an unparalleled economic crisis.
• Russia's countermeasures, including potentially choking off oil flows from other countries risks an unprecedented oil price spike that will potentially do nothing to curb money flows to Russia, as the price will more than make up for lost volume.
• If the expected global market mechanism will not kick in to spread the effects of the oil shortfall from the EU to the rest of the world, the EU economy could shrink by as much as 1/3.

Vladimirovic/E+ via Getty Images

Investment thesis: As the Ukraine war drags on, there seems to be a growing mood for an escalation of the economic war. The latest proposal is for a Russian oil export ban by the EU, which is by far Russia's largest customer. Aside from a number of EU governments, which are well-known anti-Russia hawks, there is also a growing MSM drumbeat that advocates for what could be the most irresponsible action one can think of, within the current context, short of advocating for an open military conflict with Russia. The irresponsible aspect of one-sided, moralizing anti-Russia rhetoric is that the other side of the equation, namely an honest analysis of what such a move would do to the EU, as well as to the global economy, is most often left out. If such an action were to be ever taken by the EU, my intention is to try to preemptively sell most of my non-energy and non-gold investments in my portfolio. The true economic effects of losing a large proportion of Russia's oil export volumes for a prolonged period, in addition to some secondary oil export volume losses, would be catastrophic for the global economy. With the drumbeat of ever more confrontational and aggressive positions getting louder, brushing all reasonable opposing views and concerns away, the odds of such a disastrous outcome have grown dramatically.

Opposition to self-harming actions keeps retreating in the EU

If we think back to those first few days when the Russian invasion of Ukraine started, we might remember what now seems like a distant reality, with the likes of Germany's government setting up some clear red lines in regards to the kinds of sanctions and other actions it was willing to take. It was mostly a position meant to avoid self-harm, which ought to be considered a reasonable position if we still lived in reasonable times.

Since then, Germany agreed to the SWIFT bans, including on Russia's central bank, which as I recently pointed out in an article, could spell the end of the euro as a viable global reserve currency. It agreed to scrap NS2, which will have significant long-term negative ramifications for Germany's energy security. It is progressively signing off on creeping energy import bans, including the coal ban that was recently agreed upon. It has recently signaled it is more and more willing to consider an oil ban as well. I picked Germany as the leading indicator in this regard for two reasons. First and foremost, it is one of the most exposed EU economies to a potential loss of Russian energy supplies. Second, it is the largest and most powerful member of the EU, politically and economically. If it fails to hold the line, so does the EU.

A worst-case scenario outcome is a total collapse of the EU economy, best case scenario will be a global economic crisis that will rival the 2008 and 2020 downturns

One of the latest articles I read that has been advocating for an EU embargo on Russian oil, that I found to be emblematic of the flawed thinking that is being disseminated and spread throughout society appeared on Politico recently. To summarize this proposed version of the EU ban on Russian oil, EU imports of Russian oil will stop entirely as a first step, potentially depriving Russia of a market for the greater part of the roughly 4-5 mb/d of crude and refined products that Russia sells to the EU. The argument goes that Russia's oil export infrastructure is mostly geared toward selling to Europe, therefore it would be very difficult logistically speaking to divert such large volumes of oil to Asia. The next step is to force Russia to sell the supposedly stranded oil for far less, creating a win-win for the EU.

Of course, no analysis was done of what will happen to the EU economy and more broadly to the global economy if Russia does not agree to sell its oil for near-free as is envisaged, but opts to shut in production instead. We have seen some recent analyses of the effect that a ban on Russian gas would have on the German or EU economy. A slight recession is seen as the worst-case outcome that is being envisaged, which I find to be very unrealistic. An economic depression is a more likely scenario if the cessation of Russian gas to the EU will occur going forward. I am not sure how such calculations were done in order to arrive at the conclusions that were produced but in my view, such unrealistic forecasts are feeding into the now dominant argument, namely that the economic sacrifice of such actions is a small price to pay in order to confront evil.

OPEC has been warning the US and the EU in the past few months that there is no way to replace Russian oil supplies on the global market. Key members of the group like Saudi Arabia and the UAE have been sending rather strong signals that they have no intention of raising production in order to make up for lost volumes of Russian oil being exported. It is not entirely known just how much they could do even if they wanted to, given the uncertain state of those presumed spare capacities they are supposed to be sitting on. This leaves us with the demand destruction option. There are two aspects of it to consider in this regard, the global aspect as well as the EU aspect.

A formula for the global oil supply/demand relationship to global economic growth that I came up with, mostly for my own personal use since I started investing over a decade and a half ago, is perhaps the best we can do for an estimate of the impact of the loss of up to 5 mb/d of Russian oil would have on the EU economy and more broadly on the global economy. I will assume that the world will find 2 mb/d in extra supply, via strategic reserve releases, increased supplies from certain major producers, Russian supplies diverted to other markets, and so on, therefore the net loss for the global economy would be 3 mb/d.

My formula that calculates the amount of oil supply growth needed to accommodate any given level of global economic growth is as follows:

1.5 (percentage efficiency gains every year) + (% increase in oil supply x 2) = Average yearly potential GDP growth

Over the years I found that this formula more or less provided an approximate forecast of global oil demand growth. For instance, according to the World Bank, average global GDP growth by year in the 2010-2019 period was about 3%, while the total average yearly oil supply growth was about 1%. In other words, the global economy expanded just under the potential growth rate that oil supply expansion would have allowed for. The formula is therefore approximately in line with real-world conditions.

Working a 3% decline in global oil supply into the formula, we get a negative drag on the global potential GDP growth rate of about 4.5%. Given that the current rate of global GDP growth is estimated at around 4%, we would see a slight global decline in GDP as a result of such a ban on Russian oil.

Note: The calculation for the above situation is as follows:

1.5 + ( -3 x 2) = -4.5

Calculating the damage of such a sustained Russian oil ban on the EU economy, we get a far more shocking result. Assuming that the EU would be able to source half of the lost Russian oil flows from elsewhere, it would still experience demand destruction for roughly 2.5 mb/d of oil that its economy would be left without, which is equivalent to about 18% of the total EU + UK demand. We would be looking at an economic contraction of roughly 32% for the period that such a ban would be sustained. We should keep in mind that the EU economy is currently forecast to expand at a rate of about 3%.

Note: The calculation for the above situation is as follows:

1.5 + ( -18 x 2) = -34.5

There is a chance that my formula is perhaps not best suited to the EU situation in particular, given that it is a formula that deals with the global demand for oil relative to economic expansion, rather than just the EU. The economic structure of the EU is different, therefore my calculation is probably significantly off the mark. There are other factors to consider, including the possibility that once we reach a certain level of decline in oil supply, the formula I used breaks down. There is no recent real-world precedent that we can test the formula against, therefore we have no way of knowing to what extent it is accurate. Having said that, I doubt that we would be looking at the kind of minor impact that analysts produced in regards to the potential loss of Russian gas imports in the EU. I suspect that the potential impact of such losses in energy supplies tends to be closer to my approximate forecast, rather than the ones currently circulating, courtesy of establishment forecasts.

The assumed factors that lead me to believe that the EU will suffer an outsized shock relative to the rest of the world if it imposes an oil ban stem from the fact that certain assumptions in regard to the global oil markets may be somewhat outdated. The going established assumption is that the EU would simply enter the market, and try to bid up the price of oil until the oil from elsewhere will flow, with demand destruction occurring more or less uniformly worldwide due to the price effect.

If we think back carefully to what OPEC has been saying, there is a chance that no such thing will happen. The Western World used to be by far the most prized market for OPEC many decades ago.

EU oil imports 2000 versus 2019 & 2020 (EC)

US imports of OPEC oil (Statista)

OPEC used to work closely with the Western World on most issues relating to the oil markets. Things have fundamentally changed in the past few decades. The US is no longer dependent on OPEC oil, while the EU still is, but it is also an economy that is very committed to steadily reducing oil consumption as part of its efforts to fight climate change. The EU is therefore not exactly a prized customer for OPEC members anymore. The relationship with the US was always the more important factor that kept OPEC aligned with the Western World, but the shale revolution helped to put an end to that geopolitical dynamic.

Emerging economies in Asia on the other hand are still increasing their oil demand and they are increasingly importing from OPEC. Those economies are now OPEC's new prized customers and OPEC members will most likely act accordingly in order to secure their long-term market interests. They will probably work to sell oil at a discount for those customers, relative to the price that EU customers will pay. OPEC members will also work to ensure that an adequate volume of oil will flow to their important Asian customers, leaving just a small fraction of what they export to be diverted towards the EU market.

A geopolitical rather than a market outcome may seem far-fetched in this regard. After all, decades of precedent would suggest it would be an unlikely scenario. I personally think that there will be many events and trends that we will observe and experience this decade, which will break with decades-old precedents. The world has changed, and this decade will be one of adjusting to a number of new realities. One of them, as I mentioned above is the fact that OPEC no longer regards the Western World with the same importance as a trade partner as it used to.

The other obvious assumption that we can make is that many OPEC members view the increased use of economic sanctions by the West as a potential threat to their own well-being. It, therefore, makes sense for OPEC members to support Russia's position, to both gain an ally that could help them in the future, and to also blunt the future desire of the West to continue with such sanctions in the future. If Saudi Arabia were to be targeted in the future, Russia could lend some support by reducing its own oil output, providing Saudis with much-needed food supplies, weapons systems, and potentially in other ways as well. For all these reasons we can expect key OPEC members to continue refusing our demands to help with our economic war against Russia.

The support that Russia is receiving from outside the Western World, whether the help comes in passive or direct form is making it far more likely for it to reject any sanctions regime on its oil that the EU is now increasingly likely to implement. It may correctly calculate that the resulting economic damage done to Russia will be far less severe and far less permanent than the damage that will be done to the EU. This will be the case, especially since we are seemingly in a sustained global commodities boom cycle, which to date seems to have no imminent expiry date. It is therefore increasingly likely that we are headed down a path of attempted mutual economic destruction between Russia and the EU.

Investment implications

While there are many factors to consider when contemplating the potential outcome of the current economic war sliding into an all-out effort between Russia and the EU to destroy each other, the fact that we are on a slippery slope in this regard is undeniable. It is driven by an incessant call to fall in line and support a cause that we are increasingly made to believe is the most important cause out there, and that we should be ready to engage in a great deal of individual and collective sacrifice in order to stem evil from winning.

On the other side, they are told this is an existential threat to the very survival of Russian nationhood, with regime change and subsequent capture of the levers of power, NATO outflanking of a besieged Russia, as well as the well-being of their ethnic kin in Ukraine, all on the line. If these economic pressures on Russia are meant to get them to back down, it is unlikely to succeed. The economic destruction of one of the two camps is therefore the likely outcome. While the Russians are likely to incur significant economic damage, the EU is in fact the party that is most likely to be pushed to the point of economic collapse, as this thing keeps escalating.

If or when an actual ban on Russian oil will take place, my intention is to move out of all non-oil or non-gold assets in my portfolio, and I hope to have the foresight to do so before everyone else starts selling. There are also many investments I feel relatively comfortable holding if the EU decides to turbocharge the current global commodities bull market through a Russian oil ban. I currently have Suncor (SU) stock as the biggest holding in my portfolio by far. I also have gold exposure via Barrick (GOLD), GLD (GLD), and physical gold. I bought Peabody (BTU) stock at the beginning of the year and I do believe it would further benefit from any further tightness in the global energy markets. Cameco (CCJ) is also a stock I feel comfortable continuing to hold. Everything else I will be ready to liquidate because it would most likely see a dramatic decline in value.

Regardless of how an EU ban on Russian oil will play out, it will have a dramatic effect on the global economy. In an article I wrote at the end of 2021, entitled; "2022 Will Be The Beginning Of The Era Of Widespread Global Scarcity" I highlighted the growing challenge that the world has in providing the economy with abundant supplies of many crucial raw materials, including oil, which I saw going into a prolonged period of shortage by the second half of this year, even without the disruptive effects of the Ukraine conflict. An EU embargo will remove a few million barrels per day of oil and product supplies from the global market, because of logistics that prevent Russia from immediately pivoting towards Asia for all its sales. Russia will not be willing to give away oil for near-free as some people like to envisage, so it will not continue to flow to the EU. The Politico article I linked to for my article does correctly point out that if Russia will have to shut in production, it will be very challenging to get it started again, therefore it might take years for Russia to get back to its geological potential in terms of crude oil production if a significant shut-in of production were to occur. What this means is that we are risking making a very bad long-term situation, much worse.

While classical economic theory would suggest otherwise, the EU will suffer an outsized impact from the cessation of Russian exports of oil and refined products to the EU. Market mechanisms will not divert enough volumes from other markets, for all the reasons I already mentioned. In other words, OPEC members will find it in their long-term interests to protect their market shares in emerging markets in Asia, where demand is still growing at a robust pace, rather than diverting it to Europe for short-term gains in revenues per barrel. The situation will result in much pain for the Russian economy, but far more pain for the EU economy in my view. Even as Russia will export lower volumes of oil, gas, wheat, palladium, and so on, all of these crucial commodities will gain in their price, to levels that will partly or even completely offset the revenue loss that Russia will experience from lower export volumes. The EU economy however could easily outright implode due to an acute energy shortage.

The concentration of the impact on one single entity creates a risk of a systemic collapse of the global economy. If the market would be able to spread the demand destruction needed to cover the shortfall in global energy stemming from a halt of Russian exports to the EU, then we would be in for yet another global economic downturn, not unlike the 2008 crisis or the more recent COVID crisis in terms of intensity and overall pain for individuals and the markets. If the impact will be concentrated in Europe, the EU economy could shrink by as much as 1/3, which will most likely trigger an all-out institutional collapse that will send financial and economic shockwaves worldwide. The Russians could in fact amplify the damage by withholding other key commodities, calling on allies and friends around the world to do the same, making use of some of its geographical realities to block oil and other exports to the EU, and even making use of some of its assets in places like Africa to hit EU and US interests there. The recent supposed weather-related halt in Kazakh oil exports through Russian territory may be an example of what Russia could do in this regard. Bottom line is that if this confrontation continues to intensify, I for one want to greatly reduce my exposure to most stock assets and I want to do so before the rush through that proverbial narrow exit door will commence.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of CCJ, GOLD, GLD, BTU, SU either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[ghiblinewt]

It is difficult to believe that the EU could be that myopic, as to blow off one of its own feet with an oil import ban, but then you only have to think about some of the other decisions its bureaucrats have made in the past decade or so to realize that, yes, they may actually try this. Phenomenal.

[AlexS]

@ghiblinewt They keep shooting themselves in the foot until they run out of feet.

[ransim7222]

@ghiblinewt
The European Greens have boxed themselves into a corner. They said we don't need oil and gas and that renewable energy, which they idealize, is the answer to everything. So now they have to put up or shut up. The world media is all-in behind Ukraine so the European Greens have to sanction Russia in some meaningful way. Oil sanction is the only thing that truly hurts Russia, but it hurts the EU also, and they now have to endure that part. They know their renewable energy program is not up to the task, but they can't go against the world media that has propelled them to political stardom. The European Greens are truly stuck. I just hope the European populace is not so blinded by ideology that they cannot see who actually created this mess and cuts these idiots down to size at the ballot box. Or this craziness will be repeated ad nauseam.

[ghiblinewt]

@ransim7222
Yep. This is their doing all right, pure ideology, little physics, closing down nuclear plants for intermittency of wind and solar, then having to reopen coal stations to cover the shortfall. EU is suffering these ideologues' stupidity, but until they kick them out of office we can only presume it'll continue. C'est la vie.

[AlexS]

21st Century wars in which the U.S.takes part or has taken part (according to Wikipedia):
Afghanistan 2001-21
Iraq 2003-11, 2014-21
Libya 2011, 2015-19
NW Pakistan 2004-18
Somalia 2007-present
Syria 2014-present
Uganda 2011-17
Ukraine 2022-present
Yemen 2002-present

Peaceful?

[ransim7222]

@AlexS
20th Century wars and their combatants, Hang on it is a LONG list and the US is rarely mentioned.

www.totallytimelines.com/...

But Russia and the Europeans are mentioned a LOT.

[ransim7222]

@AlexS Now China and Japan have a history of war going back over two thousand years, try that for not peaceful.

[AlexS]

@ransim7222 That's true. The U.S. was peaceful 2000 years ago. At least that we know of. But actually probably not.

[GGB11]

I like your contrary views, but it appears that the EU has already decided to sanction oil by the end of the year (but not NG?). We are in for a long war, and this is the appropriate response. Russia's offense will shortly run out of gas, they will make a small retreat to secure their supply lines, then dig in for a long war. The Ukrainians will harass but so long as the Russians remain within artillery & air dominance, Ukrainians are too smart to attack into Russia's strength. This goes on until Putin dies or Russia becomes bankrupt.

I agree with your portfolio recommendations and predictions of economic pain although I think you overstate the effect to the EU, they will somehow muddle through (Germans may stop opening their windows on a winter day). The world will have to live with a long-term oil shortage.

I fear that Russia may be harmed so much that China will reemerge as their greatest threat. Their oil industry is heavily dependent upon western parts and services, now sanctioned. They have good pipelines but inadequate oil storage that is already full. The only oil that currently enters the pipes are those that have contracted customers - everything else is shut in. I agree they will be hard to reopen. The only remaining oil fields are shale or extreme cold - not possible without western parts and services. As their pipelines to China are already at full capacity, that flow will likely continue at contracted prices. There is a chance that they could sell oil by ship, but sanctions make that hard and will likely only happen at a discount.

[Zoltan Ban]

@GGB11 Thank you for your comment. I just recently talked to someone in Romania. She was saying how she can no longer afford to set her thermostat in her small place above 18 Celsius. Demand destruction has already been happening at household, and business levels. Fertilizer plants were closed, smelters, and ceramics producers. Drivers are paying 2 euros/liter for gasoline/diesel in many countries, leading people to drive less. Any additional demand destruction will lead to economic pain.

[GGB11]

@Zoltan Ban - what is your thought on CLF (steel) & VALE (iron & nickel) once the downturn begins? Seems that demand will be reduced but so will their competition, only sooner. I will hold for now but may want to convert to SU.

[Zoltan Ban]

@GGB11 Thank you for your comment. I have not been following those companies lately. Perhaps I will take a peak soon. If you feel that certain companies currently have value, given longer-term considerations and you can afford to ride out any turbulence this year and perhaps next, then it might be worthwhile to have a position. What I like to do when there are prospects of turbulent times that can affect those stocks, is hold a smaller position in case that turbulence does not materialize and then, once the risk of turbulence is diminished perhaps just add some more, or not and just ride the smaller position on the way up. If turbulence does occur but feel that a company is otherwise solid, add some more after it sells off due to turbulence, making the average cost of those purchased stocks lower. I will see if I decide to cover these particular stocks soon.

[Chancer]

I have no sympathy for the EU for twice having stupid (self inflicted "shooting in the foot") energy policy.

First, to move too quickly out of fossil fuels into dependence on renewables before they were ready.

Second, now moving much more out of fossil fuels into uncertainty that they will lack the energy to supply industry- resulting in huge economic and job losses.

But, as I said, the EU did it to themselves, and their voters elected the bad decision makers- especially Merkel in Germany, who exited just in time to avoid the responsibility for this EU mess.

[Strong&Long]

@Chancer actually, EU should had been moving even quicker out of fossils and into renewables. It wouldn't have today's problems if it did so.
I strongly believe that the situation with Russia and extreme gas and oil prices sill put the renewables iniciative on streoids now.

As EU found out the hard way, the renewables means not only ecology but also independence.

[Ellis_Wyatt]

@Strong&Long yes, if they pushed on the same rope even harder they could have avoided their current predicament…

[autofocus111]

@Chancer I have a different view of Merkel. She was an adamant supporter of NS2. If she had remained in power, rebuffed US (and some EU member countries) opposition to it, and managed to get it done without conditions, Ukraine would have been economically threatened by the potential loss of future natgas transit revenues, become more amenable to a compromise vis a vis the Donbass situation to improve relations with Russia (and secured that transit revenue), and Russia may have had less reason to proceed with its special operation. Sure the USA and some Eastern European countries may not have been happy with that outcome, but quite possibly this war could have been averted, EU's energy security would have been maintained, and green efforts could have proceeded on a more rational timeline.

[Untoneo]

Interesting article though. Thanks Author.

[Untoneo]

not so bullish picture for oil/product tankers demand... Europe did outbid Asia this past winter to attract more LNG cargoes so they can bridge the peak season demand...

[BastiatFrederic]

Globalist corporate socialists have duped us into believing that the Western sanctions are against Russia. In fact, these sanctions are against us. They wish us neither freedom nor prosperity. Our impoverishment and dependency leads to an increase in their power. Russia is going to do just fine with these sanctions. They have alternative markets for their oil and gas and grains and fertilizers and industrial metals. By depriving ourselves of these resources, we just make them expensive and scarce for ourselves. Will there be food shortages in Russia? Not bloody likely.

The largest beneficiary of the Western sanctions is China. Without firing a shot, China has now obtained a guaranteed supply of these valuable resources at sub-market rates. Any likelihood Chinese consumers will face a grain shortage or Chinese consumers will face energy rationing? Any chance Chinese factories will find themselves unable to obtain nickel or molybdenum? Will Chinese agriculture be unable to obtain fertilizer? No, it’s only Western consumers and manufacturers who will be unable to obtain these resources. WE ourselves are the target of the Western sanctions.

[ransim7222]

@BastiatFrederic
Then you should be investing in Russia and China right now. Go for it. GLTY.

[BastiatFrederic]

@ransim7222 I know you are being sarcastic, but I’ll give you a serious answer anyway. For Russian, Chinese, and Indian citizens, investing in Russia immediately after the brief downturn from the initial shock of Western sanctions would have been a fairly obvious and highly profitable idea. The Russian ruble was around 80 or 90 to the dollar before the war, went down to 127 and is now below 70. These option to make such investments is closed to Western small investors, though, due to sanctions. As for investing in China, the Chinese economy is highly politicized in that companies favored by Communist Party bigwigs will prosper and those who lose favor will tank. Only those with inside knowledge are likely to prosper, and the Chinese stock market is notoriously volatile.

China is also an enemy nation, and I prefer not to invest in their companies. That is slightly hypocritical, of course, since many Western multinational corporations essentially favor China and the CCP system of governance over the West. And, I do invest in these multinational corporations.

[ransim7222]

@BastiatFrederic
Yes, I was being sarcastic. I wanted to emphasize that IMO, the benefits to China are short-term, at best.
The price of the Russian ruble is an often used and highly manipulable metric. Like the DOW, it can flip on a single phrase from a financial maven or committee. I pay it little attention. The sanctions will take a while to truly bite, so time is important, to Putin and the rest of the world. He cannot afford a long war and knows the sanctions will hurt him and his people in the long run. China will suck Russia dry, given the chance. Their border disputes are regular in occurrence and variable in intensity and they are not friends. We have a chance here to weaken both nations, who indeed are our enemies, economically, politically, and militarily, and we should take it. I agree that investing in them, particularly now, is counterproductive to the long-term interests of the West.

[mslasky]

Interesting perspective. IMHO, if the EU stopped all Russian oil imports - China & India would buy more Russian oil - creating a bifurcated market - western buyers paying more. Nuclear power would look far more attractive - and France would gain a major economic advantage due to it's installed nuclear base. Electric vehicle demand would increase, as would retrofits for insulating buildings - insulation being cheaper than wasting fossil fuels to heat buildings. The biggest threat to humanity is climate change, and many of the implications bring foward climate change worthy responses (albeit, unintentionally). Not disagreeing with your perspective, just adding my POV.

[Chancer]

@mslasky:

With EU economies declining in GDP, employment, and tax revenue, where do they get the funds for big infrastructure spending on climate change?

Joe Biden did VOLUNTEER that US taxpayers will pay for 100% (ALL) of the climate change conversion costs for the entire world. Maybe, the US will pay to bail out the EU and just add that to more US debt.

Of course, Biden has to convince Congress to pay for it.

[RayLorrey]

@Chancer as usual, a transparent lie about Biden -- is it so difficult to make an argument without lying?

[SMRT]

@mslasky indeed, Mr Putin is in fact helping to save the planet.

[rh_kul]

It could be a lot worse! We could see a 60% decline in oil consumption - following your calculations, gdp would actually decline by 118,5%! It would be the first time we would have a negative gdp in the history of the world. Imagine that...

[Zoltan Ban]

@rh_kul Thank you for your comment. As I pointed out in the article, I do think that at some point the relationship breaks down. There is however no real-life precedent to tell us at what point. Regardless, I do think that my model is far closer than the outlandish assumptions that such large volumes of energy can be lost, with very little drag on the economy.

[zorionak]

Spot on, Zoltan! Unfortunately, it seems too many emotional factors based on distorted views of the complex political situation in Ukraine have come to dominate EU decision making. China and Opec seem to be the two big wild cards. How much of Russia's oil/gas is China prepared to absorb? The BRI also includes Kazakhstan( another oil producer). It seems an arrangement has already been made between Saudi prince MbS and Putin, as well as an agreement with China to sell Saudi oil for yuan. All this seems to confirm your analysis re bad times for the EU and who knows where beyond.

[l'ami canadien]

Looks like a win-win to me. Doing the right thing (short of going to war) to counter the Russian genocide of the Ukrainians; and forcing ourselves off carbon fuel sources at the accelerated pace required if we want to avoid total societal breakdown this century. One cannot expect to confront major bad actors like Russia, or existential threats to humanity like anthropogenic climate catastrophe, without some pain and disruption. As the British said facing the threat of Hitler in 1939, "Keep Calm and Carry On".

[terziev]

@l'ami canadien I don't mind YOU getting "some pain and disruption". Your choice. However, I strongly oppose YOU, YOUR rabid Russophobia and YOUR post-Puritan climate catastrophe faith inflicting "some pain and disruption" on ME and my people.

[l'ami canadien]

@terziev I don't know who your people are, but if they are Russian, look no further than Putin for who is causing your pain. And expect a whole lot more to come, economically and militarily. Russia is not a country any sensible investor could put any money into at this point in time and not for a long time into the future. Investing in Russia now would be like investing in Nazi Germany in 1939. No company or nation with any common sense is going to do it. Russia's policy of genocide against their peaceful neighbour means they are no longer welcome in the community of nations. Their economy will be like North Korea's but with shut-in wellheads. The leadership has absolutely lost the plot, and Russia's only hope is to replace that leadership. Otherwise, investment wasteland, internal instability, poverty and pain. And if you think it looks bad now, wait until Kadyrov unveils what he has in store, for Russia.

[Duuuuh]

Call Putin's bluff, nucs included because bullies never stop until seriously challenged.

[Extreme Income Plus]

@Zoltan Ban wow, the commentary here is almost universally completely opposed to what you’ve written.

I follow numerous oil and energy guys who
I trust, in addition to you (who I also trust) and they are saying very similar things to what you are saying.

I put my money where my commentary is, as I am long energy pretty significantly, and other commodities too.

I think many in this thread will be extremely surprised that your theories will come much closer to what actually happens than they currently believe.

Thanks I think this was an excellent article, and I agree with you.

Jim

Extreme Income Plus

[AnalogNomad]

Any significant rise in the cost of oil, above what we're already witnessing will only serve to further expedite the rate of adoption and demand for EVs. The Soviets (as far as I'm concerned "Russia" was a wonderful experiment that commenced in the early 90s effectively ended in late February - a completely unnecessary self-inflicted wound) are peddling a product that is increasingly falling out of favor with consumers world-wide. The pricier it gets - the more attractive an EV appears to look. I understand, there are still many fossils out there who enjoy the stench of gasoline as much as they do the taste of carcasses- who'll vow to never drive EVs, or eat a plant-based burger - but that's a dying breed - quite literally. We are witnessing the final days of oil - and while it will continue to be used in diminished capacities for many years to come, as a major fuel source for regular consumers, it's demise will only be expedited by any spike in price coming our way. The proof is on the road of every developed part of the road - and eventually, as prices continue to drop on EVs, so it shall be everywhere else.

[Extreme Income Plus]

@jsj9s8xil2 I simply could not disagree more vehemently.

Plant-based burgers and electric vehicles are luxury items, and Will be easily deferred purchases when gasoline is 12 or $15 a gallon and an EV costs 60 grand.

People will be way more interested in surviving and keeping their family budgets in line than buying a new Tesla or other relatively high priced vehicle.

If we were approaching booming times I might agree with you. We are not and I strongly disagree with you.

Jim
Extreme Income Plus

[ro7all]

@Extreme Income Plus a lot of people must have a huge stores of fairy dust saved up.

[SMRT]

@Extreme Income Plus Not every EV is a Tesla and not every EV costs as much as a Tesla. I just bought one (european brand) for far less than 60k

[AlexS]

I think the worst case scenario is that everything goes boom. Other than that I think you're right.

[ransim7222]

I feel you make some erroneous assumptions in this article.
First of all, Russia needs the Western countries to maintain its oil production capacity. Neither Russia, nor China can replace Shell, Exxon, Chevron, Total, and all of the other Western oil companies that have, when put together, hundreds of years of expertise in oil production and maintenance, and transport.
Second, it is not just oil. If push comes to shove, the countries dealing with Russia will be denied access to SWIFT and eventually the dollar. Saudi Arabia, Oman, Dubai, the UAE, and others all need the US and the West for protection. They will not sacrifice their own national security to help Russia.
Third, if the world has to choose, do you really think they will forgo selling to the greatest buyers of goods on the planet, the EU and the US? China depends on exports and cannot even support itself with consumerism, much less all of Asia. And the Russian economy is barely the size of South Korea and will be much smaller by the time this is all over.
Fourth, the Russian population has been decreasing anyway, so what will the tens of thousands of war casualties do to them? I have also read they are experiencing an IT brain drain and Putin has started giving special deals to IT people who choose to stay.
Fifth, how long will a sick and slightly crazy Putin be able to maintain control in a country known for doing away with its leaders when they become useless or harmful?
IMO, Russia is headed for a world of hurt. But they deserve it.

[Zoltan Ban]

@ransim7222 Thank you for your comment. All or at least parts that you say may be true enough. Russia could be in for a very tough time going forward. Although, the ruble now trades at about 8% above pre-war levels versus the USD. The euro lost about 7% versus the dollar in the same period. Perhaps a sign that some long-term consequences may hit harder elsewhere and the market expects as much.

[ransim7222]

@Zoltan Ban
The long-term strength of the dollar is not threatened by these kinds of things, it is always increased. When people fly to safety, it is not the ruble or the yuan they want, it is the dollar. There is a reason that people, as well as businesses, are fleeing Russia just like they are fleeing Ukraine. Having a sick, belligerent, and possibly paranoid man in total charge of a country, who is also threatening to launch nuclear weapons, does not cause people to think of its currency, or the country itself, as safe.

[Mr Nobodi]

The dangerous ideas were the ones that made the EU reliant on Russian O&G in the first place. They are finally coming back to their senses but still have a long ways to go.

[Zoltan Ban]

@Mr Nobodi Thank you for your comment. It is not like there were always going to be endless alternatives. Someone on this planet was always going to consume that Russian energy. It made geographical sense for Europe to do so. It still does make the most sense in that regard. I think the EU might find out what life will be without that dependence soon, and I have a feeling that it will not be pleasant.

[ransim7222]

@Zoltan Ban
What geographical sense did it make for the EU to close down its nuclear facilities in favor of Russian oil? There is a lot more than just economics at work here, Green politics strikes again!

[Zoltan Ban]

@ransim7222 Thank you for your comment. You are right, the war on nuclear energy in the EU, or at least in some countries makes very little sense.

[IamTheWolf]

IMO you're closer to the mark when you say "There is a chance that my formula is perhaps not best suited to the EU situation in particular, given that it is a formula that deals with the global demand for oil relative to economic expansion, rather than just the EU. The economic structure of the EU is different, therefore my calculation is probably significantly off the mark. There are other factors to consider, including the possibility that once we reach a certain level of decline in oil supply, the formula I used breaks down. There is no recent real-world precedent that we can test the formula against, therefore we have no way of knowing to what extent it is accurate."

The trend of lower combined oil imports from EU and USA will accelerate, if anything, from any higher prices due to reduced supply. That provides a perfect opportunity for other suppliers to sustain their output in the face of decreased demand at the cost of Russian supply while others increase market share.

The sympathy by all parties starts at home and are not primarily extended to cross-country or supply/demand loyalty. OPEC will gladly fill the void while continued demand destruction will work against Russia. The latter will never see revenue flows of the past. A perfect setup, economically driven, that benefits the world entity-by-entity far more than Russia.

[Puppychow]

@IamTheWolf After Putin cut off two EU countries, the rest are weaning off Russian oil and gas on an accelerated timetable. Good luck to Russia trying to blackmail Germany, etc now.

[Zoltan Ban]

@Puppychow Thank you for your comment. Actually, it seems no one is weaning off of anything. Bulgaria is buying Russian gas from Greece, and Poland from Germany. Truly weaning off of Russian energy would mean stop buying, and find a real replacement. Anyone who knows the global energy situation to some basic extent knows that it is not possible for the short term. The global supply/demand situation is very tight right now.

For the longer term, a game of musical chairs can occur, where Russia sells into Asia, while EU buys some freed-up resources resulting from it. That of course is assuming that resources will be freed up and Russian energy will not be swallowed up by growing demand in the region, in which case things will look rather bleak in the EU.

[Zoltan Ban]

@IamTheWolf Thank you for your comment. You are assuming that price signals will greatly increase supply. My suspicion has been for some years now that OPEC spare capacity is overstated. And as I pointed out in the article, it is not about sympathy, but rather longer-term self-interest that trumps the desire for shorter-term financial gain.

As for US production? Just saw the latest EIA monthly data for February. Oil production was about 500 k barrels/day lower compared with November 2021. It does not seem that the higher price environment of the past year has done much to stimulate more production.

I think the Rystad data in regards to yearly global oil & gas discoveries can put the current situation in the best perspective.

www.rystadenergy.com/...

In 2021 about 5 billion barrels of conventional oil & gas were discovered, while the world produced and consumed about 45 billion barrels of oil equivalent. There was a significant shortfall in this regard every year this century. Within this context, the EU plan to completely break with Russia on energy imports seems like a desire for economic suicide. That, or a complete rupture with factual reality.

[terziev]

You're stating the obvious which is an extreme viewpoint by now. Fortunately, such "extreme views" are generating a lot of alpha.

[Dtip]

Not sure I would go as far as liquidating everything but I agree that move would hurt the entire global economy. If the US and EU leaders are not careful a new stronger Russia may emerge from this mess.

[Zoltan Ban]

@Dtip Thank you for your comment. As I pointed out in the article, there are plenty of investments in my portfolio that I do not find to be undesirable investments within the context, in fact I think the opposite might be the case. Take Suncor for instance. It can increase production, even as oil prices would skyrocket if the EU goes ahead with a ban on Russian oil.

[Puppychow]

@Dtip Due to incompetence in Russian war planning, they lost a huge portion of the elite troops/specialist units during the opening weeks of war. On top of that, Russian army lost double digit generals on the battlefield. Their tanks kept getting destroyed because Russia never fixed the design flaw of storing ammunition within the turrets (known for the past decade and a half). All those lost experienced troops and leadership, and equipment will be very difficult to replace. So I disagree with the notion that, at least militarily, a stronger Russia will emerge. And the Western sanctions pushed the economy back 15 years; so Russia is also weaker economically. Plus the younger gen in their 20s and 30s are leaving the country, causing a brain drain of tech workers.

Meanwhile, Russia is forced to sell it's commodities at steep discounts to China's benefit. So their relationship turned from coequal to a Batman-Robin.