Europe bans Russian diesel fuel and other oil products due to war in Ukraine

FRANKFURT, Germany — Europe on Sunday imposed a ban on Russian diesel and other petroleum products, reducing energy dependence on Moscow and seeking to further cut the Kremlin’s fossil fuel revenue as punishment for its invasion of Ukraine.

The ban is accompanied by a price cap agreed by the G7 allies. The aim is to allow Russian diesel fuel to continue to flow to countries like China and India and avoid sudden price increases that will hurt consumers around the world, while slashing the profits that finance Moscow’s budget and the war.

Diesel plays a key role in the economy because it is used to power cars, trucks carrying goods, farm equipment, and factory equipment. Diesel fuel prices were raised due to a recovery in demand from the COVID-19 pandemic and limited refining capacity, which contributed to higher inflation for other commodities around the world.

New sanctions create price uncertainty as the 27-country European Union finds new supplies of diesel from the US, the Middle East and India to replace supplies from Russia, which at one point supplied 10% of Europe’s total diesel needs. fuel. These are longer voyages than from Russian ports, taking into account the available tankers.

Prices could also rise due to a pickup in demand from China as the economy recovers from the lifting of draconian restrictions imposed due to COVID-19.

The $100 per barrel price cap for diesel, jet fuel and gasoline should be enforced by prohibiting insurance and transportation companies from handling diesel fuel at a price above the cap. Most of these companies are located in Western countries.

This follows a $60 per barrel price cap on Russian oil that went into effect in December and should work the same way. Both diesel and oil caps could be tightened later.

“Once we set these price caps, we can compress the Russian price and reject them, deny (President Vladimir) Putin money for his war without a price hike that would hurt Western and emerging economies,” said Thomas O’Donnell. Global Fellow at the Washington Wilson Center.

The restriction on diesel prices does not bite right away, because it was set approximately at the level at which Russian diesel fuel is traded. Russia’s main problem will now be to find new customers, and not move away from the price ceiling. However, the restriction is intended to prevent Russia from benefiting from any sudden hikes in the price of petroleum products.

Analysts say there could be a spike in prices initially as markets adjust to the changes. But they say the embargo should not lead to a price hike if the restriction works as intended and Russian diesel continues to flow to other countries.

Diesel fuel at a gas station has not changed since the beginning of December and cost 1.80 euros per liter ($7.37 per gallon) as of January 30, according to the weekly oil market report released by the European Union’s executive commission. Pump prices in Germany, the EU’s largest economy, fell 2.6 cents to 1.83 euros per liter ($7.48 per gallon) as of Jan. 31.

The ban provides for a 55-day grace period for diesel loaded on tankers through Sunday, a move to avoid market turmoil. European Union officials say importers have had time to adjust since the ban was announced in June.

In December alone, Russia made more than $2 billion selling diesel to Europe as importers appeared to stock up on additional purchases ahead of the ban.

Europe has already banned shipments of Russian coal and most of its crude oil, and Moscow has cut off most of its natural gas supplies.

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