The European Commission is at a crossroads at the moment. Europe has been contemplating measures to reduce the dominance of Russia on the energy market and has now agreed on a new measure that will cut the Russian oil price cap from February this year, potentially reshaping the supply economics for the myriad of European refiners. Russia’s ongoing war in Ukraine has devastated the global oil industry; however, most of Europe still buys energy resources from Russia, creating a paradox for the European market.
Europe needs to wean itself off Russian oil and gas in the near future
The aforementioned paradox comes as Europe has been working to wean off Russian energy in all its forms. While steps have been taken, the reality is that Europe needs to find an alternative supplier and develop a working relationship to eventually end the reliance on Russian oil and gas.
Some may state that Europe should simply not purchase any Russian energy; however, the reality is that the transition away from Russian energy is no simple task. Over the past two years, Europe has taken positive steps to reduce the amount of energy purchased from Moscow. In 2024, Europe relied on Russia for approximately 45% of its energy needs.
Over the past two years, however, that number has drastically fallen to roughly between 13%-19%. The EU recently outlined a plan to end imports of Russian gas entirely by the end of 2027, while providing a few exceptions for long-term contracts.
The price of oil has skyrocketed as nations search for an alternative supplier
The global oil price skyrocketed once Russia invaded Ukraine, and it has not really recovered since. Recent drone attacks by Ukraine on oil pipelines and tankers in and around Russian territories have exacerbated the issues for Moscow. The EU Commission has now revealed a cut in the Russian oil price cap to place further pressure on Putin.
January 15 saw a new automatic and dynamic price adaptation for Russian crude oil prices
On January 15, the EU Commission implemented a new dynamic and automatic price adaptation for the OIL Price Cap on Russian crude for the first time. Effective from February 1, the new price cap for Russian-made crude will be $44,10 per barrel, with the EU noting that any older contracts concluded under the previous price cap can be executed for an additional 90 days.
Under the EU’s 18th sanctions package on Russia, the oil price cap was dramatically lowered from $60,00 to $47,60. Along with the lowering of the cap was a new automatic and dynamic mechanism to set the future price for Russian crude. The EU has noted that the new mechanism ensures that the oil price cap is consistently 15% lower than the average market price for Russian crude.
As the EU outlines plans to eliminate the flow of Russian oil into the continent, the new Oil Price Cap will be subject to review by the EU Commission every six months, while some reviews will be conducted under extraordinary circumstances if deemed necessary by the EU.
“Constraining Russia’s energy revenues has consistently been, and will remain, a top priority for the EU, with the view of weakening Moscow’s ability to wage its illegal war of aggression against Ukraine.” – EU Commission
Geopolitical tensions around the world have created a volatile energy market
With the latest Oil Price Cap on Russian oil coming into effect in February, and the ongoing situation in Venezuela, the international oil and gas market has become a volatile market. US companies are preparing to handle feedstock from Venezuela, and the oil industry is painting a picture of new oil developments led by the EU and the United States as the end of Russia’s dominance on the global energy stage nears.
