On May 4, Ursula von der Leyen, president of the European Commission, announced a proposal to ban EU imports of Russian oil, which would be phased out within six months for crude and by year-end for refined products.[1] The ban involves both seaborne and pipeline imports. Attention has been primarily focused on crude, but the potential implications for petroleum products such as diesel, gasoline, and fuel oil are considerable.

Dr. Luisa Palacios, Dr. Robert Johnston, and Antoine Halff, senior research scholars at the Center on Global Energy Policy, discuss the proposed ban’s likely impact on refined product markets, specifically diesel, and why Latin America in particular is positioned to lose out. The conversation then turns to the secular shift in refining capacity from Organization for Economic Co-operation and Development (OECD) countries to emerging economies, and the broader geopolitical implications of the globalization of product markets that the invasion of Ukraine has brought into sharp relief.

How would the proposed EU ban on Russian oil impact petroleum refined product markets?

The impact on refined product markets could be as severe as that on crude oil markets.

  • Russia is the world’s second-largest exporter of refined products after the US, with total product exports estimated at 2.8 million barrels per day (b/d) in 2021, and Europe is Russia’s top importer by far.[2]
  • While Russian crude exports dwarf product exports in terms of volume, for importing countries the former may be easier to replace than the latter. That’s because product markets, though increasingly globalized geographically, are far more fragmented than crude markets. The makeup of demand by product category differs widely across consumer countries, and global refining capacity to produce middle distillates (diesel), a key Russian export, is limited.  

Which refined products would be most impacted by this ban?

Within the refinery complex, the ban would affect diesel and fuel oil more than gasoline.

  • Diesel, fuel oil, and other feedstocks such as naptha make up the bulk of Russian product exports. Diesel is Russia’s top export product, accounting for one million b/d, or about 40 percent of Russia’s total product exports in2021.[3]
  • Not only is the EU a large diesel consumer – it accounted for nearly 25 percent of the world’s total diesel consumption in 2021 and as much as 40 percent of global diesel imports in 2020[4] – but also its main diesel supplier by far is Russia. In 2021, Europe procured more than half of its diesel imports from the former Soviet Union – mostly Russia.[5] Conversely, Russia sells more than 60 percent of its diesel exports to EU countries, generating nearly $30 billion in revenues in 2021.[6]
  • Fuel oil (FO), residual fuel oil (RFO), high-sulfur fuel oil (HSFO) and “Mazut-100” (categorized as “Unfinished Oils” in US EIA statistics), which constitute Russia’s second-largest petroleum product export, would also be affected.[7] While Russia supplied most of the EU’s fuel oil imports, the latter accounts for only 6 percent of Europe’s product demand compared to 50 percent for diesel, and there is more potential for alternative suppliers.[8] In fact, these products were already impacted by the US ban on Russian oil in early March, as the US is the top buyer.[9] 
  • Gasoline markets, by contrast, are unlikely to be directly affected. Most of Russia’s gasoline output is consumed domestically and the EU is a net exporter of gasoline. Even so, a ban on Russian crude would likely impact gasoline prices because crude is the main feedstock for processing gasoline.

Beyond Europe, which regions/countries would be most impacted?

Although the proposed oil ban would most directly affect EU countries, European efforts to find alternatives to Russian exports would have ripple effects across product markets. Perhaps no region would be more impacted than Latin America.

  • Latin America imports most of its refined products from the US and would likely lose out if it had to compete with Europe for US product exports. Approximately 80 percent of US diesel exports go to Latin America, with Mexico the top buyer followed by Brazil and Chile. Imports account for 70 percent of the diesel consumed in Mexico, 25 percent of that consumed in Brazil, and 60 percent of that consumed in Chile. Most of this imported diesel comes from the US. If Latin America suddenly had to compete with Europe for US refined products, it might have little choice but to turn to Russian refiners in need of new market outlets for their distillate supplies.  

Figure 1: US diesel exports by destination (2000-2021).

Source: Authors’ estimate based on data from the US Department of Energy’s Energy Information Administration.

  • Russia’s domestic product markets could also be impacted. With 6.9 million b/d of refining capacity, Russia has already been forced to reduce throughputs and even shut down units since the invasion for lack of market outlets.[10] Should these closures last, Russia could struggle to meet its own gasoline demand. The IEA estimates that about three million b/d of Russian oil exports could be shut in, including 1.1 million b/d of products.[11] 

What about the refining industry and the geopolitics of the refining market?

  • The current energy crisis sparked by Russia’s invasion of Ukraine has spurred a dramatic rebound of refining activity across the OECD following the slump caused by COVID-19. Surging OECD refining margins have lifted capacity utilization, particularly in the US, which is seeing record oil exports. 
  • The crisis is unlikely to reverse the multi-decade erosion of OECD refining capacity, though. In the last decade, refinery closures in Europe and OECD countries outside Europe have been offset by a nine million b/d capacity increase in non-OECD economies, bringing the latter’s share of global capacity to 56 percent.[12]  While an EU ban on Russian oil imports is unlikely to reverse this trend, given the headwinds of the energy transition for OECD countries, it could stall it.[13]
  • The crisis could also accelerate the expansion of biodiesel capacity in OECD countries.[14]
  • Whereas the geopolitics of oil is generally understood to refer to crude, the current crisis is bringing attention to the geopolitical dimension of the downstream industry, given that refining products represent about 35 percent of the oil trade and its center of gravity has been shifting towards emerging markets.[15] An EU ban on Russian product imports could reshape product trade flows substantially and significantly impact international relations and global security.

The authors would like to thank Diego Rivera Rivota and Tatiana Mitrova for their input and help with statistics.

Notes

[1] Ursula von der Leyen, “Speech by President von der Leyen at the EP Plenary on the Social and Economic Consequences for the EU of the Russian War in Ukraine – Reinforcing the EU's Capacity to Act,” May 4, 2022, European Commission, transcript, https://ec.europa.eu/commission/presscorner/detail/en/speech_22_2785.

[2] IEA, Energy Fact Sheet: Why Does Russian Oil and Gas Matter?, March 21, 2022, https://www.iea.org/articles/energy-fact-sheet-why-does-russian-oil-and-gas-matter.

[3] IEA, Russian Supplies to Global Energy Markets, February 2022, https://www.iea.org/reports/russian-supplies-to-global-energy-markets.

[4] OPEC, Annual Statistical Bulletin 2021, Oil Data Downstream, April 2022, https://asb.opec.org/ASB_Charts.html?chapter=132.Error! Hyperlink reference not valid.

[5] IEA, Oil Market Report, April 2022, https://www.iea.org/reports/oil-market-report-april-2022.

[6] See Russia’s customs statistics service at http://stat.customs.ru/.

[7] In Europe, Russian HSFO was widely used as bunker fuel until 2020, when new sulfur standards from the International Maritime Organization shifted demand to lower-sulfur fuels. HSFO is still burnt by those ships that have been retrofitted with scrubbers to capture its sulfur emissions.

[8] bp, Statistical Review of World Energy, 70th edition, 2021, https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdf....

[9] The White House, “FACT SHEET: United States Bans Imports of Russian Oil, Liquefied Natural Gas, and Coal,” press release, March 8, 2022, https://www.whitehouse.gov/briefing-room/statements-releases/2022/03/08/fact-sheet-united-states-bans-imports-of-russian-oil-liquefied-natural-gas-and-coal/.

[10] “Russia's Idle Primary Oil Refining Capacity Hits All-Time High in April,” Reuters, April 29, 2022, https://www.reuters.com/article/russia-oil-refining/russias-idle-primary-oil-refining-capacity-hits-all-time-high-in-april-idUSL3N2WR348.

[11] IEA, Oil Market Report, March 2022, https://www.iea.org/reports/oil-market-report-march-2022.

[12] For an earlier analysis of some of the consequences of this secular trend, see Antoine Halff, “The Impact of Refining Sector Changes on Patterns of Oil Product Trading,” Oxford Energy Forum 92 (May 2013): 4–5, https://www.oxfordenergy.org/wpcms/wp-content/uploads/2013/07/OEF_92.pdf.

[13] Before this crisis, McKinsey was expecting closures of about five million b/d in the next five years in advanced economies to compensate for the significant ramp-up of refining capacity in emerging markets. Emily Billing, Tim Fitzgibbon, and Alexandre Ferro, Global Downstream Outlook to 2035, McKinsey, June 1, 2021, https://www.mckinsey.com/industries/oil-and-gas/our-insights/global-downstream-outlook-to-2035.

[14] EIA “U.S. Renewable Diesel Capacity Could Increase due to Announced and Developing Projects,” Today in Energy, July 29, 2021, https://www.eia.gov/todayinenergy/detail.php?id=48916#:~:text=Several%20former%20petroleum%20refineries%20plan,b%2Fd)%20in%202023.

[15] IEA, World Imports of Primary and Secondary Oil Products, 1972-2019, last updated August 10, 2021, https://www.iea.org/data-and-statistics/charts/world-imports-of-primary-and-secondary-oil-products-1972-2019.