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Capital Economics: What will it cost Europe if it cuts Russian oil with a knife?

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One European embargo on Russian oil would push prices higher and exacerbate the precision problems already facing consumers, warns Capital Economics. However, oil is easier to replace than gas and eventually the impact on the development of the European economy will be less than many believe, the house said, forecasting an impact of less than 0.5% for this year. .

About a quarter of EU imports of oil and petroleum products comes from Russia. This share is less than that of natural gas (about two-fifths of European imports come from Europe).

However, given that oil plays a larger role in the energy mix than natural gas (around 35% vs. 25%), Russian oil and gas ultimately have a similar share in the total energy consumed by Europe (around 10% each). .

So what if Europe banned Russian oil? Oil is easy to buy and sell, so it would be easier to replace it than gas, Capital Economics notes. There would of course be some short-term market disruption and some logistical challenges that would have to be overcome, especially in refinery capacity.

As existing distribution infrastructure is designed for oil flowing from east to west, supplies to the eastern part of the EU would be difficult, at least in the beginning. Some landlocked countries, such as Slovakia and Hungary, will be particularly vulnerable, analysts say.

But these challenges can be overcome relatively quickly and with some coordination. The fact that most Russian oil is delivered to Europe by sea is the main difference from natural gas, and in general, refineries near ports tend to be more flexible than the types of oil that can be delivered. refine.

In general, however, EU countries they usually have 4 to 5 months of stored oil, so exploiting these stocks could buy time, as long as alternative supplies are secured.

However, Capital Economics believes that some precautionary measures would probably be needed to reduce consumption, especially in diesel. However, the immediate effects of these measures would not be serious for the economies.

On the contrary, the biggest impact comes from the further increase in the price of oil and the impact on the already burdened household budgets.

Capital Economics’ baseline scenario speaks to an average price of Brent at $ 110 a barrel for the rest of the year. As a general rule, any increase in the price of oil by $ 10 per barrel from these levels raises inflation in the Eurozone by about 0.2 percentage points this year. If it reduces consumer spending by a corresponding percentage, the negative impact on growth this year will be of the order of 0.1 percentage points.

In the extreme scenario of the house, which speaks of a complete ban on all Russian energy exports from the West, Brent is expected to reach an average of $ 125 a barrel for the rest of 2022.

In this case, the Eurozone GDP will be 0.15 percentage points lower than the central scenario.

And if oil were moving closer to $ 150 for the rest of the year, the loss for growth would be about 0.4 percentage points.

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