Russia and the EU are such important players in the world energy markets what happens between them can affect many other places in the world, including the GCC.

Russia exports more than 6 million barrels a day of petroleum and petroleum products and about 4 million barrels a day of this go to the EU.

If Russia embargoes oil to the EU, or the EU bans the import of Russian oil, then there would be a huge call on other oil suppliers by the EU. This could bring oil prices to levels we have never seen before. Prices of $300-350 per barrel of oil, or even higher might be in the realm of possibilities. Prices of refined products like petrol would be many times what they are now. The world would go into a deep recession, or even a depression. But such drastic results are not inevitable.

The EU and the IEA have recently published their plans to considerably cut back on oil demand. Even if these plans materialise, alternative supply sources other than the Russian ones will still be highly needed, but to a lesser extent. Where would the alternative oil sources come from? Many have proposed that the GCC would be a source for the extra needed oil. But the excess capacity available in the GCC and through all the Organization of the Petroleum Exporting Countries does not seem up to it. And many of the oil exporters could be quite wary of using up their excess capacity. The US, Canada, and some others could export more to the EU, if they can develop the capacity to do that.

If on the other hand the Iran deal goes through, the EU might get tempted to replace the lost Russian oil with imports from Iran. That would be a big mistake. Why send billions to a terror state? There would be similar temptations to import from Venezuela. But that is a narco-state.

Then there are the problems with port capacity, pipeline, storage, and tanker capacity on both the supplier and consumer sides. It is not just production capacity that is important. Transport, storage, refining, and other capacities are also vital to the resolution of any oil and oil products shocks. The infrastructure changes for oil coming from the sea would be less than the oil coming along pipelines near refineries. It can take many years from discovery to production for oil to come on stream. It can take a long time to build the infrastructure and facilities to transport, store, and refine crude. The oil business takes time. Shale, also known as tight oil, can move faster than offshore and onshore conventional oil, but few places outside of the US are looking hard enough at tight oil. But increasing capacity does not happen overnight.

The EU’s production of oil has been declining for many years. It could not, as the US could, ramp up its shale oil fields in quick order. The EU is mostly against the development of shale, and it would take them a long time to get the infrastructure ready to do that anyway.

Other countries that import oil from Russia, such as India, China, South Korea, Japan, and non-EU European countries could be affected by the pull on their supplies by the EU. There is only so much oil out there. Tankers, ports, energy exchanges, and more would have to redirect their efforts in many ways. India and China may import more Russian oil as excess supply will be generated due to lower EU demand. Japan and South Korea may not.

Over 60 percent of Russia’s petroleum and petroleum products go to the EU. Around 60 percent of Russia’s export revenues and 30 percent of its government budget come from energy exports, and oil revenues are a huge part of this. The Russian economy would be suffering even more than it already is if oil exports were to come under embargo.

As more time passes, consumers of oil will look to change from oil to other sources of fuel. They will also have less money available to buy oil. Consumers and their leaders will remember this.

For the GCC and OPEC, this could mean the beginning of the end for oil and a speeding up of the energy transitions in many places. At first OPEC revenues may increase. But in the longer run, with substitution effects, OPEC revenues could decline more quickly than what would have happened without the Russian oil shock. The recession/depression from the oil shocks could also destroy demand.

In the longer run, the EU and other natural gas markets may move to other sources of energy to replace the expensive gas.

Dr. Paul Sullivan

Now add in an embargo of natural gas exports to the EU. A Russian embargo of natural gas exports to the EU would shut off 175 billion cubic meters of gas to the bloc. The EU could find some alternative sources from piped gas from Algeria, Norway, Azerbaijan, and a very few others. It could increase its imports of liquefied natural gas from Qatar, the US, Australia, and even Trinidad and Tobago.

But is there enough excess capacity in LNG liquefaction to replace all that Russian natural gas with LNG? Not yet. Are there enough LNG carriers to move all that LNG into Europe? Not yet.

The gas shock would cause logistical and supply chain turmoil and prices would increase very quickly. Big LNG importers like China, Japan, and South Korea, and even some of the smaller LNG importers like India and Pakistan would experience energy price and supply shocks. If the IEA and EU plans to reduce the EU’s demand for natural gas actually succeed, the shocks on a global level would be much less. The EU would become more energy secure than it is now.

The US could ramp up its shale gas fields to increase its production of gas that could be turned into LNG and exported and shipped to the EU. But to make up for the lost Russian gas to the EU would take time, even if the US gave the right incentives for shale gas output and the increase in the infrastructure needed. And, frankly, it is unlikely the US could fill most of the gap left by Russia’s departure. But it could help reduce the burdens on the EU.

In the longer run, the EU and other natural gas markets may move to other sources of energy to replace the expensive gas. This also could help speed up the energy transitions and eventually hurt natural gas suppliers. In a place like the US, the increased demand for LNG for the EU will raise the price of gas.

However, in a place like the US, more gas could be produced as prices go up, which could cause the industry to grow. Qatar may be a winner from this also, as might Norway, Algeria, Azerbaijan, Egypt, Australia, and other natural gas exporters who could join in supplying the gas-shocked EU in the short to medium term.

Over the longer run, gas producers could see their markets shrink faster than they otherwise would, due to substitution effects, with consumers moving to other fuels and the income effect from a deep downturn created from a combination of oil and gas shocks.

This situation could also push more consumers and countries to speed up their energy transitions. OPEC could be a big loser from all of this as demand for its major source of income declines more rapidly than planned. The plus in OPEC+ may end up being a minus.

• Dr. Paul Sullivan is a senior research associate at KFCRIS and non-resident fellow, Global Energy Center, Atlantic Council.