Europe imposes diesel, oil ban products to cripple Russia's fossil fuel earnings

Europe imposed a ban on February 5 on Russian diesel fuel and other refined oil products, slashing energy dependency on Moscow and seeking to further crimp the Kremlin’s fossil fuel earnings as punishment for invading Ukraine.

The ban comes along with a price cap agreed upon by the Group of Seven allied democracies, per AP. The goal is to allow Russian diesel to keep flowing to countries like China and India and avoid a sudden price rise that would hurt consumers worldwide while reducing the profits funding Moscow’s budget and war.

Diesel is key for the economy because it is used to power cars, trucks carrying goods, farm equipment and factory machinery. Diesel prices have been elevated due to recovering demand after the COVID-19 pandemic and limits on refining capacity, contributing to inflation for other goods worldwide.

The new sanctions create uncertainty about prices as the 27-nation European Union finds new supplies of diesel from the US, Middle East and India to replace those from Russia, which at one point delivered 10% of Europe’s total diesel needs. Those are longer journeys than from Russia’s ports, stretching available tankers.

Prices also could be driven up by reviving demand from China as the economy rebounds after the end of draconian COVID-19 restrictions.

The price cap of $100 per barrel for diesel, jet fuel and gasoline is to be enforced by barring insurance and shipping services from handling diesel priced over the limit. Most of those companies are located in Western countries.

It follows a $60-per-barrel cap on Russian crude that took effect in December and is supposed to work the same way. Both the diesel and oil caps could be tightened later.

“Once we have these price caps set, we can squeeze the Russian price and deny them, deny (President Vladimir) Putin money for his war without a price spike that’s going to hurt Western economies and developing economies,” said Thomas O’Donnell, a global fellow with the Washington-based Wilson Center.

The diesel price cap will not bite immediately because it was set at about what Russian diesel trades for. Russia’s chief problem now will be finding new customers, not evading the price ceiling. However, the cap aims to prevent Russian gains from any sudden price spikes in refined oil products.

Analysts say there might be a price bump initially as markets sort out the changes. But they say the embargo should not cause a price spike if the cap works as intended and Russian diesel keeps flowing to other countries.