One alternative to Russian
oil
is from Saudi Arabia in the nearest 2-5 years, or from Iraq, Libya and the U.S.
in the nearest 5 years or more. If the West arranges for oil deliveries from
Saudi Arabia, it could drop the price on world markets to $80, which will cause
a major decline in Russia’s economy, whose growth projections for 2014 were
based on an oil price of US $100-110.
As to Russian natural gas, the only competitor in the
short term is shale gas from the U.S., although even if we could assume that
deliveries to Europe would start tomorrow – realistically we’re looking at 2015
– they will still only cover about 32 percent of European demand: the EU consumes
135 billion cubic meters of Russian gas annually, while the U.S. will be able
to start delivering only 44 billion cubic meters in 2015. According to our
calculations, it will cost no more than $400 per 1,000 cubic meters. In some EU
countries, this will make it cheaper than Russian gas. From 2016 on, American
deliveries of gas could double. By 2030, deliveries of American shale gas on
global markets could be up to 150 billion cubic meters and completely cover the
necessary volumes currently coming from Russia. The two alternatives described
here are completely realistic, although they will only have a real impact over
the next five years.
What can Europe do today? If EU countries make the
political decision to cut back on their consumption of Russian oil and gas,
taking advantage of accumulated reserves, they could cut down the need for
deliveries by 20-50 percent, but not more. With petroleum, the U.S. could do
this by using its strategic reserves and causing an artificial temporary
increase in the supply of oil on world markets or by increasing deliveries from
certain OPEC countries, like Saudi Arabia or Iran. The EU gas market can
increase supplies of liquid gas from the U.S. and the Persian Gulf countries – primarily
Qatar – and refuse to sign any more long-term contracts with Gazprom, the price
of its gas being tied in to the price of oil.
The impact on the Russian
economy of partial reductions in the consumption of oil and gas. According to our
calculations, the most realistic option today is to reduce the consumption of
Russian energy by 20 percent, while also reducing its price by 20 percent.
Given that 28 percent of Russia’s budget is based on taxes received from export
profits on the sale of energy, a partial reduction in its consumption will reduce
the Russian budget’s revenues by 8 percent or $126 billion. Who will be hardest
hit by this “smallish” reduction in revenues? Based on the breakdown of
expenditures in the Consolidated Budget of the Russian Federation – federal
budget plus local and regional budgets – the social sphere will suffer the
most, as it took 33.7 percent of the budget in 2013, while programs in support
of individual branches of the economy took 13.2 percent, and education took
11.6 percent. Healthcare would be slightly less affected, since it takes only
8.7 percent of the Consolidated Budget.
The
EU has already finished drawing up the third package of sanctions against
Russia. We hope that the EU will be ready to take the risk of a temporary cut
in the consumption of Russian energy, all the more so when there are real
options that would allow this on the part of OPEC countries.
Liubov Akulenko is head of
European programs at Centre UA, a non-profit group that promotes public
accountability of government and integration with European structures and
institutions. Dmytro Naumenko is an expert at the Institute of Economic
Research and Policy Consulting.
