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War in Ukraine. By opting for oil from the Emirates, France “will secure the volume but will pay a high price for it”

War in Ukraine.  By opting for oil from the Emirates, France “will secure the volume but will pay a high price for it”
Written by madishthestylebar

“We are going to accelerate investments in the energy transition (…) and then we are also looking for substitutes for the supply of gas or diesel from Russia – for example, the United Arab Emirates can be an at least temporary alternative oil and Russian diesel,” said Bruno Le Maire on Saturday. The Minister of Economy clarified that “discussions have already been initiated” with the United Arab Emirates to replace Russian oil hit by a European embargo.

The European Union on Friday imposed a new package of sanctions on Russia. Among these, the banning of most Russian oil imports, with an embargo within six months. Can the United Arab Emirates be a good alternative? Anna Creti, professor of economics at Paris-Dauphine University, analyzes this hypothesis.

Does Bruno Le Maire’s announcement that France is discussing with the United Arab Emirates to replace Russian oil surprise you?

“No, it was foreseeable that a real barrel race would take place and moreover, Bruno Le Maire is accompanied by other European Prime Ministers such as the Italian Prime Minister who made a similar announcement, but he went to Venezuela. It testifies to an attitude where it is necessary to seek an alternative to Russian oil and we do not have a very vast panoply of producing countries.

In any case, it’s not surprising, because we have a little time, six months, to try to secure our own oil supply. It’s clearly every man for himself and for lack of a common strategy, each country is trying to see what resources are available”.

Is the United Arab Emirates a good alternative to Russian oil?

“It’s a country that has very large oil reserves and a potential ability to increase productivity. It’s not too far away, we’re staying in the Middle East, that could make it possible to transport this oil.

The problem is that each country is targeting an OPEC member for reasons that have to do with historical proximity. In my opinion, we should try to talk to OPEC as a cartel. Every European country is playing a “divide and conquer” strategy. Everyone is trying to fragment OPEC – which is already sufficiently fragmented – and this leaves no room for a truly coordinated medium-long term strategy. No one dares approach Saudi Arabia, where there are really big reserves, because it is clearly the country that makes the decisions in OPEC. But it’s only if OPEC moves that oil prices go down. Otherwise, we can supply the various countries in volume, but as long as there is no strong announcement from OPEC’s point of view, the price per barrel will remain high and increase. We will secure the volume but we will pay a high price for it”.

Is it a different market?

“We talk about oil but within these hydrocarbons, there are different varieties of oil that must be refined in a specific way depending on the quality of what is extracted. Russian crude oil and Emirati crude oil are quite comparable, so they will be able to benefit from relatively similar transport without a lot of intermediate purification steps. So it is immediately available.

The question is not yet clear for refined products, such as diesel. There, we have the whole question of the refining chain, which we have completely lost in Europe. It’s not clear what’s going to happen.”

What are the consequences for the French (cost, quantities available)?

“The problem is really the price. There is a lot of oil, we are sitting on oil reserves globally. The problem is the capacity of the producing countries and therefore of the companies of the oil companies, to increase their production knowing that today the margins of capacity are limited. The volume is not a problem but you have to organize the logistics, the transport, distribution and refining chain: it will have its cost and it is the countries that will make this effort. For the producing countries, there is no question of concluding profitable markets for the final consumer.

This poses two immediate problems: we give bad incentives to oil-producing countries by asking them to increase their production capacities when we would like, in terms of carbon neutrality, to succeed in reducing oil production as much as possible . We are stepping back from the energy transition. The other problem is the very very high cost of this operation”.

To which other countries could France turn for its supply?

” Norway. It is the closest country with infrastructure: we have gas pipelines that arrive in the north of France. Ports can be mobilized to receive Norwegian ships. The problem is that Norway has a very low capacity margin so it is not expected that it will be able to increase its production to meet all the requests from European countries. So we have to look to other countries.

Then there is Algeria which is already one of our main suppliers. But here the idea is to look for alternative offers and then be able to renegotiate at the margin with countries that are already oil suppliers. What is certain is that the closer we are to the Mediterranean basin, the more these producers will be in demand”.

Could France turn to other energies as an alternative to Russian oil for France?

“It would be better in terms of policy and the message given. You really have to try to reduce the demand. Today, oil is used mainly for transport in the petrochemical industry and in fertilizers, agriculture. In transport, you need to have a sustainable mobility policy: electric cars, encouraging carpooling, use and investment in public transport, regional trains… You have to enter into a different transport logic.

Further, there is what will not be available immediately: synthetic fuels, which could be solutions for aviation. We must also accelerate to increase the possibility of recycling in the plastics sector. We must encourage less chemical agriculture. These are known levers, which form the basis of the national low-carbon strategy, of the commitments made vis-à-vis the Paris agreement, but it has to become a daily effort. »

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