Europe’s Ban of Russian Oil Will Create A Domino Effect on Energy Prices

Europe’s planned ban on imports of Russian coal is set to further tighten an already tight global coal market and create a domino effect on the prices of coal, natural gas, and electricity not only in Europe but also in other regional markets. 

Coal markets globally were already tight even before the Russian invasion of Ukraine as the energy crisis and natural gas shortage in Europe and Asia in the autumn of 2021 pushed up the use and price of coal. The two major coal-consuming countries in Asia—China and India—were scrambling to procure enough of the dirtiest fossil fuel as skyrocketing natural gas prices incentivized more coal use for power generation. At times, coal supply was severely constrained, also because of China’s unofficial ban on Australian coal imports.

China’s coal demand is not going anywhere, as the country will continue to maximize the use of coal in the coming years as it caters to its energy security. 

This week, as the Russian war in Ukraine and reports of Russian atrocities in Ukrainian cities pushed Europe to propose a ban on Russian coal imports, coal supply in Europe, Asia, and globally is once again facing constraints and rallying prices. As a result, prices of other energy commodities and of power generation are set to spike, too.

Coal prices in northwest Europe jumped this week to their highest level in one month after the European Commission proposed on Tuesday a ban on imports of Russian coal over Russian war crimes in Ukraine. 

“Finally, it was high time to take this step. It is the first time that we directly sanction the import of fossil fuels from Russia, thus cutting an important revenue source,” European Commission President Ursula von der Leyen said in a speech on 6 March.

The EU approved on Thursday (7 March) the new package of sanctions against Russia, including a ban on coal imports from Russia. 

Since Russia meets a large part of coal demand in Europe, the EU will scramble to procure the fuel from exporters much farther away, which would cost more to ship from South Africa, Colombia, the United States, and even Australia.

The coal market has been tight for months, even without a European embargo on Russian coal, so prices are bound to spike again as global coal trade flows will have to be reshuffled. This will take time and raise the costs of shipping, resulting in higher coal and electricity prices.

“The coal ban means European consumers will have to brace for high power prices throughout this year as supply shortages in countries that rely on coal generation will spread across the continent via its well-connected power grids,” Rystad Energy said in research last week.

Germany, Europe’s biggest economy, will be particularly hit, as well as Eastern Europe, the energy research firm noted.

Europe will face challenges in getting alternative supply, even at high costs, considering that the global coal market is already very tight. Major exporters such as Australia and Indonesia will have a limited amount of coal to spare for Europe, considering the freight costs and long voyages and the continued high coal demand in Asia.

Moreover, coal’s specifications vary in terms of calorific content as not all coal is equal, and power generators suited for Russian coal could see higher costs of burning non-Russian coal.

“Even though it seems feasible to find partial solutions to the coal crisis that is developing in Europe, the European population will have to deal with the consequences and factor in historically high electricity prices for at least the remainder of 2022,” Rystad Energy said.

“Power prices across the region will be set by the marginal sources of supply, which are gas and coal. Both these fuels are now trading at exceptionally high levels and will therefore have a direct impact on the power market.” 

By Tsvetana Paraskova for Oilprice.com