Think Tank: Concerns About EU Sanctions Against Russian Oil and Gas

PeopleOther ♦ Published: May 29, 2022; 23:52 ♦ (Vindobona)

For some time now, the business community has been complaining about the lack of information on how gas and oil will be distributed sensibly in the event of a supply freeze from Russia. The Austrian Economic Research Institute (WIFO) is also concerned about the future of the energy supply and discusses possible solutions.

Russia supplies Austria with Gas and Oil. / Picture: © Gazprom

The Austrian Institute for Economic Research (WIFO) deals with the problem of energy supply in Europe and Austria caused by the Russian invasion of Ukraine.

In an interview with ORF, WIFO head Gabriel Felbermayr stated that now is the time to draw up appropriate plans to secure energy supplies. Otherwise, chaos threatens in the fall, according to Felbermayr.

Wifo has been working for some time on solutions to minimize the economic damage if Russia blocks its energy supply to Europe.

Gas supply to Austria

According to Wifo, gas is of immense importance in the Austrian economy.

Whether as an energy supplier or as a raw material for basic chemicals, significant reductions in the quantities of gas supplied to Austria would not only worsen the living conditions of many households but would also lead to significant economic consequences.

WIFO head Gabriel Felbermayr stressed on ORF's "Pressestunde", that the government must quickly consider before the fall how exactly gas will be allocated in an emergency. He also said that WIFO does not know the details, "we could be better informed". From his point of view, priority sectors - first and without restrictions, households, but also, for example, the electricity sector and food production - should be defined. Within these sectors, it would then be necessary to further determine how to distribute there.

Wifo is discussing a hybrid allocation procedure for scarce natural gas, which first identifies classes of goods with different priorities based on data and then uses an auction mechanism within these classes of goods to allocate gas as efficiently as possible.

Oil supply to Austria

Wifo also discusses the economic impact of extending EU sanctions to imports of crude oil and processed petroleum products from Russia.

These sanctions could be imposed in the form of an oil embargo or less restrictively and thus with less immediate negative knock-on effects for the EU economy in the form of import duties, according to Wifo.

Russia is a major supplier of oil and oil products. Within the EU, import dependence on Russian oil supplies is very heterogeneous. For Austria, Kazakhstan is the most important country of origin for crude oil, according to Wifo.

In the case of Russian countermeasures, EU oil imports from other CIS countries are at risk. In the short term, OPEC countries are the main alternative source of supply. Processed petroleum products, such as gasoline and diesel, are purchased in Austria almost exclusively from other EU countries - above all Germany - and are not imported directly from Russia. However, this creates a high degree of indirect dependency. A shortage and consequent increase in the price of fuels would have a negative impact on the transport of goods and passengers.

The Wifo suggests that import tariffs are likely to have several advantages over an oil embargo. Through a gradual increase, the adjustment of the domestic economy proceeds better via price effects than via an immediate reduction in volume.

Wifo stresses that the instrument can be flexibly and strategically adapted to the economic and political dynamics of the conflict and, in addition to higher prices, also leads to tariff revenues in the EU. As a consequence of an embargo or the introduction of an equivalent import tariff, simulation results for Austria suggest a short-term increase in the inflation rate by 0.5 to 0.75 percentage points and a reduction in economic output by 0.3%.

WIFO Austrian Institute of Economic Research