The European Union has announced a ban on imports of diesel fuel and other products produced from crude oil in Russian refineries. The ban will take effect on February 5th, following the E.U.’s embargo on coal and most oil from Russia. The E.U.’s latest move aims to cut its ties with Russian energy sources and prevent funding for the Kremlin’s war chest.
However, the ban poses significant risks, with diesel prices already jumping since the war began on February 24th. Diesel is a crucial component of the global economy, powering trucks, buses, farm equipment, and industrial machinery. The increased cost of diesel is reflected in the price of almost everything, contributing to rising inflation and making life more difficult for people worldwide.
“We’re leaving money in the road to provide our services,” said Hans-Dieter Sedelmeier of the family-run German bus and travel company Rast Reisen. The E.U.’s ban on diesel fuel and other products from Russian refineries is the latest in a series of steps the bloc is taking to cut its energy ties with Russia and send a message to the Kremlin.
The recent embargo on Russian diesel exports has raised questions about its impact on diesel prices. According to experts, the outcome is uncertain as the success of the price cap imposed by the Group of Seven significant democracies is dependent on the price set and Russia’s response. There should be no significant loss of supply if the cap works as intended. Europe will find new suppliers, and Russian diesel will find new customers. However, if the cap does not block a large amount of Russian diesel, a price spike could occur as the market adjusts.
Europe has already reduced its import of Russian diesel from 50% to 27% and has turned to the U.S. for its diesel supply. The U.S. has increased its shipment of diesel to Europe to record levels. In spite of the adjustments, Hedi Grati, head of fuels and refining research at S&P Global Commodity Insights, warns that if Russian exports are constrained, Europe will compete with other big importers, causing upward pricing pressure.
The Russian government has imposed a diesel price cap, intending to replicate the effects of the oil price cap. Western companies controlling shipping services were barred from dealing with Russian crude priced above $60 a barrel. The Russian government has stated that it will not sell oil to countries that observe the price ceiling. Despite this, the cap and declining demand from the global economy have allowed customers in countries like China and India to buy Russian oil at steep discounts, reducing the Kremlin’s revenue.
The rise in diesel prices has been caused by a combination of the more expensive crude and a late December storm in the U.S. that disrupted refineries. As a result, diesel prices spiked to over $1,000 a ton last week from $800 a ton in the beginning of December. Fuel prices have been a significant factor behind inflation in Europe, slowing the economy and robbing consumers of purchasing power. The diesel prices at the pump have increased from 1.66 euros per liter to 2.14 euros per liter in the last year.
The German trucking company, Schuldes Spedition, has already attempted to optimize its fuel costs by equipping trucks with efficient engines and training employees in fuel-efficient driving. However, there is limited room for further optimization. The company attempted to negotiate higher prices with customers with long-term contracts but with little success. The managing director of the bus and travel company Rast Reisen, near Freiburg im Breisgau in southwestern Germany, has reported that diesel fuel has risen from 12-15% of costs to 20-25%. Due to the fact that 15 of its 25 buses are part of the regional public transport network, the company cannot raise fares automatically, and government increases so far have been insufficient. As a result, the company had to add a diesel surcharge to trips to popular destinations, and trip prices will be higher next year.
