Europe set to ban Russian coal, but struggles over oil and gas | Economic news

The European Union is set to ban Russian coal in the first sanctions against the vital energy industry during the war in Ukraine, but it has highlighted the failure of the 27 countries to agree on a much more radical embargo about oil and natural gas hitting Russia. more difficult but risk of recession here.

The coal ban, which is expected to be approved in a new sanctions package this week, would cost Russia $4 billion a year, the European Commission, the EU’s executive arm, has said. Energy analysts and coal importers say Europe could replace Russian supply in months with other countries, including the United States

The coal ban is important because it breaks the taboo on severing energy ties with Russia. But compared to natural gas and oil, coal is by far the easiest to cut quickly and inflicts far less financial damage to Russian President Vladimir Putin’s war chest. Europe sends 20 million euros a day to Russia for coal, but 850 million a day for oil and gas.

Shocking footage of dead civilians in the Ukrainian town of Bucha is fueling the discussion of broader sanctions, with EU officials saying they are working on targeting Russian oil.

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As the European Union mulls such future sanctions, Italian Prime Minister Mario Draghi has said no embargo on Russian natural gas is to be considered at this stage.

“And I don’t know if it will ever be on the table,” Draghi told reporters in Rome on Wednesday night.

EU countries, especially big economies like Italy and Germany, rely heavily on Russian natural gas to heat and cool homes, generate electricity and run industry.

Yet, he said, “the more horrific this war becomes, the more the allied countries will ask, in the absence of our direct participation in the war, what else can this coalition of allies do to weaken Russia, to make it stop”.

Should a gas embargo be proposed, Italy “will be very happy to follow it” if it makes peace possible, Draghi said. “If the price of gas can be traded for peace…what do we choose? Peace? Or to run the air conditioning in the summer?

For now, even the coal ban has ominous consequences for politicians and consumers. Germany and EU members in Eastern Europe still generate much of their electricity from coal despite a years-long transition to cleaner energy sources.

“The coal ban means European consumers will have to prepare for high electricity prices throughout this year,” according to a statement from Rystad Energy.

Higher prices in countries that use more coal will spread across the EU thanks to its well-connected electricity grid, the energy research firm said. It will bring more pain. Europe has faced high energy prices for months due to a shortage of supply, and war jitters have driven them higher.

Governments are rolling out cash support and tax relief for consumers affected by higher utility bills. High energy prices pushed inflation in the 19 member countries that use the euro to a record high of 7.5%.

Commodities analyst Barbara Lambrecht of German bank Commerzbank said EU governments could probably agree a coal embargo as it would come into force after three months and only apply to new contracts . The downside is that this would have a limited impact on Russia, with coal accounting for only 3.5% of Russian exports and only a quarter going to the EU.

The German coal importers association says Russian coal could be completely replaced by the United States, South Africa, Colombia, Mozambique and Indonesia “by next winter” – at higher prices.

European coal futures jumped after the EU announcement, rising from around $255 a tonne to $290 a tonne.

The big debate remains around oil and natural gas, the European Union depending on Russia for 40% of its gas and 25% of its oil. It is harder for Europe to cut itself off than for the United States, which imported little Russian oil and no gas and banned both.

Yet European Council President Charles Michel said: “I think that action on oil and even on gas will also be needed sooner or later.”

Agreeing on energy sanctions between the 27 EU countries is made more difficult as some like Germany, Italy and Bulgaria are much more dependent on Russian gas in particular than others. Europe has rushed to get what extra gas it can through pipelines from Norway and Algeria and to acquire more liquefied gas shipments by ship, but those global supplies are limited.

For now, the EU’s energy plan is to cut dependence on Russian gas by two-thirds by the end of the year and completely over the next few years by boosting alternative supplies, conservation and wind and solar energy.

Germany has reduced its dependence on Russian natural gas from 55% to 40%, but the government says the consequences of a cut in terms of jobs would be too great.

The German steel association, for example, has warned of forced closures that would deprive people of their jobs or government assistance and send shortages of basic parts ripple through the rest of the economy. .

Energy Minister Robert Habeck said the country would end Russian coal this summer, oil by the end of the year and gas by mid-2024.

Oil would also be easier to ban than gas, because like coal, there is a large, liquid global market for oil and it arrives mainly by ship, not by fixed pipeline like gas.

But it’s not without problems either. Russia is the world’s largest oil exporter, with 12% of the world’s supply. Removing this oil from the market would drive up prices from other suppliers such as Saudi Arabia in a market where supply is already tight.

And Russia could simply sell the oil to India and China, which are not participating in the sanctions, although the price Moscow gets may be lower.

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