Finance4Learning | Oil Boycott, Who Pays the Price? | 9 May '22

Oil Boycott, Who Pays the Price?

We do not want Russia to wage war against Ukraine, and we do not want that war to be partly paid for by the money we pay for Russian oil and gas. So the European Commission wants an oil boycott. To stop importing oil from Russia overnight would affect our own lives and our own economy very negatively, so let's take a moment to think about it.

Google Translated from Dutch to English. Link to the original post in Dutch below. The article was originally published on 9 May 2022

There is now also a proposal on the table not to impose a boycott, but import duties. A week and a half ago, the renowned Bruegel Institute published a paper about it, which was received very enthusiastically by Mathijs Bouman in his short column in the FD.

If we impose an import duty on Russian oil, it will become more expensive. Who exactly bears which part of the burden, Putin or our consumers, depends – now it gets technical – on the relative elasticity of our demand and Russia's supply. The burden of the import levy will be disproportionately heavy on the party with the lowest elasticity, ie the party with the fewest options for contingency. According to Bruegel, the proportions are such that we can impose a very heavy burden on Putin with import duties.

 

Too good to be true

If something sounds too good to be true, it usually isn't true. That certainly applies here. Bruegel's reasoning rattles on all sides. It is a typical example of reasoning uncritically towards a desired conclusion. That there is a great resemblance to how Trump was going to teach China a lesson, I'll leave it alone for a while.

The main argument Bruegel uses is that most of Russia's oil would reach us by pipeline. The Russians cannot shift them, so their 'elasticity' is low, while Bruegel claims that we can easily switch to other suppliers.

My ears are chattering when I hear so much nonsense. Most Russian oil comes to us (the EU) via ships. Less than 17% comes through a pipeline. It's really not hard to find. The authors of the Bruegel paper apparently did not know, while it is also mentioned in a publication that appears on the (short) bibliography of the paper. Have they not read the literature they quoted themselves? Bruegel's entire reasoning falls to pieces, not to mention the fact that the supposed ease with which we can get oil from elsewhere is completely overestimated.

When I read the conclusions of the report, I immediately had some mistrust, it sounded like wishful thinking to me. My suspicions were heightened when I looked up the report and found that it is only five pages long and that as many as seven authors worked on it. When so many people are involved in a short piece, there are problems in terms of ownership. Who is still responsible for the correctness of the content?

 

Oil boycott is annoying for Russians, that's all

No, import duties will not work at all. And by the way, neither is a boycott. It gives us a better conscience, but the end of the war does not come a day closer. For the Russians, a boycott of Europe is certainly very annoying. But after some time they really do lose their oil, there is enough demand for oil in the world, although it will be at reduced prices. So a loss of revenue is to be expected, but not to an extent that would force the Russians to end the war.

We will pay higher prices. If we stop importing 4.5 million b/d of Russian oil, we will have to get that oil from elsewhere, although we can partly switch to coal. But the market is tight, there's not a lot of oil waiting for us somewhere. We can only get that oil by outbidding existing buyers of non-Russian oil. Sometimes economics is really simple.

 

Jan Modaal

An oil boycott will take a heavy toll on the European economy. If we want to pay that price to ease our conscience, we certainly must. That we are inflicting decisive economic damage on Putin is an illusion. And naming the consequences for ourselves would be fair. The tough guys in Brussels who decide to do this can undoubtedly easily afford the higher costs. Jan Modaal will have more problems with his higher bill. Let's be clear about that.

 


 

About the author
Han DE JONG is an independent economist, owner of Crystal Clear Economics, an associate of Llewelyn Consulting and a weekly contributor of Investment Officer. Han features almost daily on Business News Radio (BNR) and is an advisor to several family offices as well as institutional investors.
Han was formerly the Chief Economist of ABN AMRO Bank.

Link to the original article in Dutch

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