Russia Sanctions Collateral Damage: Diesel Shortage Risk Worsening, EV Batteries

Forgive me for what amounts to news snippets, since these items overlap with Links terrain. But the Russian sanctions induced energy squeeze looks to be bearing down on Europe and the US even faster that most sources anticipated.

First are diesel shortages, which we had warned about virtually from the get go. Russian gas is heavier than either fracked gas or Saudi light sweet crude. Heavier means more long chain hydrocarbons which are more energy dense. Lighter grades can be used to make diesel…but that’s at the expense of the gas which you presumably also wanted to have.

We had pointed out that diesel shortages are so imminent that the IEA is recommending aggressive energy conservation measures now, like more work at home, more ride-sharing, cutting air travel, so as to reduce the severity of the crunch they expect to kick in over the next four months.

The news on the diesel front is only getting worse. From the first of two germane stories on OilPrice, an overview called Europe Faces Systemic Diesel Supply Crunch:

Europe risks being exposed to a “systemic” deficit of diesel supply that could worsen and even lead to rationing of fuel, the top executives of the world’s largest independent oil traders said on Tuesday….

“This is a global problem but for Europe it’s very hard because Europe is so short” of diesel, Gunvor CEO Torbjorn Tornqvist said at the Financial Times Commodities Global Summit as carried by Bloomberg.

Europe’s diesel shortage is worsening as Russian oil refiners have started to cut back on refinery throughput, Tornqvist added.

Diesel stocks globally were already low even before the Russian invasion of Ukraine, but the shortage has now been exacerbated by the lower global diesel supply from Russia.

In the highly volatile global energy markets since Russia’s war in Ukraine began, even the biggest traders are exposed to rising margin calls. Via futures contracts in commodities, trading houses hedge against risks. Without commodity derivatives, many traders would not be able to move physical volumes of oil.

The European Federation of Energy Traders (EFET), whose members include Trafigura, Vitol, Shell, and BP, among others, has urged European central banks for “time-limited emergency liquidity support to ensure that wholesale gas and power markets continued to function,” the Financial Times reported last week, citing a letter the federation sent earlier this month.

The possibility of a derivatives shock blowing back to the physical market is a new angle, but after the LME canceled a full day of nickel trades so as not to blow up the exchange or too many big fish, do not underestimate the extreme measures that will be taken to keep perceived-to-be-too-critical-to-fail institutions and players alive.

A more specific wrinkle on the diesel squeeze story, mentioned in the piece above, is Russia Cuts Refinery Output As Diesel Shortage Worsens:

Trade with Russian diesel is becoming scarcer because of buyers in Europe steering clear of Russian shipments…

The “self-sanctioning” of the buyers has already started to force Russian refiners to reduce production, according to Gunvor’s [CEO Torbjorn] Tornqvist.

“What does that mean? It means more crude oil will need to be exported instead of the products, and we believe that is not possible and will lead to cutbacks in Russian production,” he said, as carried by Bloomberg.

Diesel stocks globally were already low even before the Russian invasion of Ukraine. According to estimates from Reuters’ John Kemp, diesel fuel stocks in Europe are at their lowest since 2008, and 8 percent—or 35 million barrels—lower than the five-year average for this time of the year.

In the United States, the situation is graver still. There, diesel fuel inventories are 21 percent lower than the pre-pandemic five-year seasonal average, which translates into 30 million barrels.

In Singapore, a global energy trade hub, diesel fuel inventories are 4 million barrels below the seasonal five-year average from before the pandemic.

On top of exacerbating a global diesel supply crunch, the sanctions against Russia are also likely to force Russian firms to shut in some crude oil production, analysts say. Russia will have to shut in some of its oil production as it will not be able to sell all the volumes displaced from European markets to other regions, with Russian crude production falling and staying depressed for at least the next three years, Standard Chartered said earlier this month.

So the perceived need to stay well away from anything Russian, even when it’s energy and other commodities that the sanctions were originally designed to carve out, is going to create quite a bit of pain. Yet even though this impact is widely acknowledged in the business press, there seems to be no will to do anything about it.

RT has a new story about how damage to a key pipeline to Europe is going to make the energy crunch worse over the next three weeks, if not longer. Hat tip Kevin W:

The Caspian Pipeline Consortium (CPC) – one of the world’s key pipelines – was forced to suspend the operation…As a result of the incident, the oil deficit on the world market is expected to increase significantly, according to experts.

The pipeline, which ships around 1.2 million barrels of crude oil daily from Kazakhstan to Europe and the US, said in a statement the condition of two hoses has not allowed “safe operation of the device.”

“We have to eliminate any risk of oil getting into the sea, so, of course, this equipment was to be decommissioned for preventive maintenance,” CPC Director General Nikolay Gorban explained.

He said that the repairs on each of the damaged floating hoses – which should be fixed one after another rather than simultaneously – would take at least three weeks. However, the weather conditions remain a major factor when it comes to the work timeline….

“In this situation, the management of the Consortium has to report possible reduction in the volume of oil transportation in the nearest future by a factor of three from the requests of shippers,” the pipeline, which is co-owned by Russia, Kazakhstan, and a number of major international oil market players, said in a statement.

Temporary disruption to the operation of one of the biggest pipelines in the world will affect many, but especially consumers in southern Europe – Italy, Spain, and the south of France traditionally receive oil from the affected CPC’s remote mooring device, Russia’s Financial University expert and leading analyst of the National Energy Security Fund Igor Yushkov said….

Besides southern Europe, the incident on CPC might be “an unpleasant event for the US,” Yushkov said.

“About 10-15% of volumes went (from this terminal) to the US market. For the United States, this is also an unpleasant event – they have just rejected the Russian oil, they need to look for an alternative supplier, and then another supplier interrupts supplies. Therefore, as a result, fuel prices in the US domestic market may rise,” the expert claimed….

“If this event coincides with other factors, a perfect storm could set in and prices could soar back to $140 to $150 a barrel,” he said.

The good thing about today’s news is that the problem is only temporary, stressed another expert, Kirill Rodionov from the Institute for the Development of Technologies in the Fuel and Energy Complex. According to his calculations, “starting from the third quarter, CPC will resume oil shipments in the same volumes.”

The pipeline operators made dutifully sincere noises about how sorry they were and how they would get everything fixed up as soon as possible. The article also said that the pipeline would be back to its old delivery level by the third quarter, so not to worry. But it is instructive to note the peculiar sensitivity about oil delivered via Russian tankers, versus the lack of much revulsion about gas and oil sent through pipelines. Out of sight, out of mind?

Finally, we along with many many others warned of the impact on automobile production, like platinum for catalytic converters, and rare earths and other metals used to build green energy generators like wind turbines, and related infrastructure, like batteries.

The battery crunch is starting, first in the form of rationing by higher prices. From yet another OilPrice piece, Batteries On A “Ridiculous” Cost Surge, Chinese EV Maker Says:

Battery prices for electric vehicles are seeing a “ridiculous” increase on the back of soaring raw material prices, and carmakers will soon have to raise prices if they haven’t done it yet, according to the top executive of Chinese electric vehicle manufacturer Li Auto Inc….

Because of rising costs for raw materials, Contemporary Amperex Technology Co. Ltd. (CATL), the largest battery maker in the world, already announced today in a statement to Reuters that it had raised the prices for some of its battery cells, without giving additional details of the price hike.

China’s Li Auto has not yet announced any price increases for its EVs.

Rising costs for raw materials and logistics have already made Tesla raise its prices for China and the United States. This month, Tesla raised its prices for the second time in less than a week.

Costs of raw materials and key metals for EV batteries, such as nickel and lithium, have skyrocketed since Russia’s invasion of Ukraine at the end of February…

Lithium prices were soaring even before the Russian war in Ukraine. Lithium prices hit a record high at the start of 2022…

Now the war in Ukraine is accelerating the rise in metals and minerals, and the soaring prices of batteries and of metals for all other components of cars, including aluminum, have already started to translate into higher EV prices, potentially slowing down the speed of EV adoption.

The one small bit of upside is the commodities price crunch will take some wind out of Elon Musk’s sails. But smaller fry will suffer.

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  1. Larry

    Elon leaned into another fabulous pump with the opening of his still not completed factory in Germany. He’ll have some other SOE optimized pump stories going to keep the momentum up.

    1. hoki haya

      the thing harped upon about CarParts being the greatest national danger, omg. if you knew how things worked here, and how every part is reused and repaired; holy christ, this is the least of our concerns.

  2. Steve H.

    Data shows heavy airline-stock short selling

    Sooo does anyone else not open Snapchat anymore? Or is it just me… ugh this is so sad

    Why wouldn’t Russia use cutouts to short commodities before they invaded? Let Wall Street pay for the invasion. Even without the direct benefit, they could tip off whoever they wanted and cause system disruption.

    A musing, not a prediction: how likely is an administrative intervention undercutting massive short losses on national security grounds? Asking for a couple of Apes I know.

    1. John Wright

      >Why wouldn’t Russia use cutouts to short commodities before they invaded?

      Shorting is profitable when the shorted item goes down in price..

      I suspect Russia would have wanted to go long.

    2. Laura in So Cal

      Interesting fact is that California oil is mostly “heavy”. Production has been declining over recent years but I don’t know if that is just because of the fact that we aren’t developing new fields (due to political climate and regs) or lack of actual oil reserves. I know we have heavy duty refining capacity to make our “special” summer blends. I don’t know if we are exporting heavy oil to other states refineries for diesel production or using it ourselves for gasoline…

      1. Punxsutawney

        It’s been a while, but I believe that there is 1 billion barrels of oil reserves off the coast of California and
        far So. Oregon. Most of the drilling was shut down as a consequence of the Santa Barbara oil spill. I was there and it was a mess at the time. If we get desperate enough, it could be reopened.

  3. PlutoniumKun

    Tesla are probably the least exposed of the car makers to rises in commodity prices. They have been a leader in reducing the rare earth components of the batteries (especially in their non-US models) and have bought up a number of key suppliers of lithium and other materials. They have also established a wider range of battery sources (especially in China) than most of the conventional car companies, and use less battery per vehicle than the new mega SUV EV’s beloved of US start ups and existing luxury carmakers. It may be that if they have a materials crunch, it will be in titanium, which they use to make the underbody shield for the battery packs in the Model S. Almost all the other key materials components of their cars come from the Americas, Africa, or Asia, and so will not be directly impacted by whats happening in Russia/Ukraine.

    The rise in lithium prices predates the Ukraine situation and is mostly driven by demand – i.e. greater sales of EV’s than expected. Its a sign of success, not failure in the EV market. Its likely aided by the huge rise in costs for ICE cars which has levelled up the price differentiation.

    It should also be pointed out that most European car manufacturers have already been retreating from diesel. This is likely to kill the diesel car stone dead, and not before time.

    1. Louis Fyne

      on the lower end models, tesla switched to lithium iron phosphate batteries from lithium ion.

      those batteries are cheaper overall, but more expensive per kWh.

      Tesla will not be immune. while not as glamorous as lithium, humble nickel is a big cost in lithium ion batteries (cathodes).

      1. PlutoniumKun

        My point is that its all relative to other manufacturers. Its hard to prove of course, but my feeling is that Tesla is in a much stronger position than conventional manufacturers who have had less cash to secure long term supplies of materials and who have to deal with a lot of legacy plant. And the newer start-ups will be sunk by a really big increase in battery prices as they will be down the list of buyers.

    2. Polar Socialist

      But what do you do with an electric car when the high energy prices (or lack of rubles) force utilities to introduce rolling blackouts?

      1. PlutoniumKun

        You use your car battery to light your house and keep your laptop charged. You then recharge your battery when the wind is blowing.

  4. Lex

    I’ve never wanted a US empire, but if we must have one I demand competence. Fine, we’ll sanction everyone and implement tariffs. There must be a plan to replace sanctioned/embargoed materials and there must be a plan to onshore/redevelop an industrial base. Most of those plans need to be operational prior to sanctions/embargoes/tariffs. The Empire of Incompetence is breathtaking. Nobody gamed out how the US is absolutely reliant on diesel and how cutting off Russian diesel/heavy crude would impact that? Nothing but a “Plan A” developed on best-case scenarios and wishful thinking.

    1. WJ

      “I’ve never wanted a US empire, but if we must have one I demand competence.”

      Unfortunately the history of empires suggests that this demand becomes ever more unrealistic with the passage of time.

  5. Solarjay

    Dear PK
    There are no “rare earth metals” in the most common lithium batteries.

    The 2 types of EV/plug in hybrid battery types are

    NMC nickel manganese cobalt and lithium of course
    LFP lithium iron phosphate

    You might be referring to the moving away from Cobalt due to lots of child labor in the DRC.

    From the point of view of cost, energy density, higher C rates, NMC is superior to LFP. It does have the slight drawback of being unstable and explode if damaged. See lots of you tube videos of exploding teslas.

    In theory LFP should be less expensive but so far not. A main advantage is being safer as they are harder to explode.

    As to the supply chain of lithium batteries, the USA has pretty much zero mining, or refining of lithium battery components. Most is all in China.

    1. PlutoniumKun

      Yes, I know, but I’ve long ago stopped trying to be pedantic about the precise definition of rare earths. Its usual now, even in the technical press, to use the term to cover any trace element required.

      1. ChrisPacific

        TIL. I naively assumed that when the press said ‘rare earth’ they meant, you know, rare earth elements. No wonder we have such a scientifically illiterate population.

  6. Andrey Subbotin

    Putin just said that any natgas contracts with countries from unfriendly list (meaning EU, US, Japan, Korea) will be signed only in rubles. Existing natgas contracts will also be converted to rubles.

  7. jefemt

    Local bike shop used to put out annual frame stickers…

    One was:
    50 MPB* *50 miles per Burrito.

    Another was a photo of Che Guevara and his pretty small ancient “Motorcycle Diaries” motorcycle:
    “When the Revolution comes, will your bike be ready?”

    Hilarious! Er…..

  8. OnceWereVirologist

    Russia will only accept rubles for gas deliveries to Europe

    Boom ! Nuclear counter-sanctions against Europe.Though not expressed as sanctions per se, if European countries maintain their sanctions they’ll have to do without Russian energy because without exporting to Russia or dealing with the Russian banking system there’ll be no way for them to pay for their oil or gas.

    Posted this to the links thread first, but I’ll post it here too, since it fits perfectly with the topic of the article. At any rate, seems like THE blockbuster story of the day so worth a double-post.

    1. Yves Smith Post author

      We said early on there was no reason for Russia to continue to supply oil and be paid in dollars if we weren’t going to let them use dollars. This was one possible response.

  9. Brick

    I am convinced that fuel supply is fragile and we will all pay the price, but so far reporting and understanding has been so poor that nobody has a chance to head off the problems. While mostly agreeing with the post arguments the reasoning feels a little like a sieve.

    A large part of the cost (70%) of lithium batteries is the graphite anode and cathode components. Most suitable graphite comes from China and the manufacturing plants have suffered major outages due to power shortages (policy and coal energy generation). Whilst raw materials from Russia play their part it might not be the whole story.

    It is also worth remembering Trading houses like Gunvor benefit from oil price volatility so Torbjorn Tornqvist may have reasons to talk up shortages. Equally a lot of Russian oil is sweat light (Siberian) and some of the heavier oil is not suitable for diesel so the situation is more complicated. Poland, Finland, Lithuania and other eastern European countries that use Russian oil as more than 50% of their imported oil are exposed. There could be a major issue with diesel for Europe if Russian oil pipes were shut down (separate to gas pipelines like Nord stream). From a European point of view things are not helped by not issuing drilling licences (Not a bad thing if other strategies work) especially off the coast of Ireland. Pouring all resources into wind and solar but not energy storage with the result that wind and solar farms are often switched off just highlights the train wreck that European (UK as well) energy policy is.

  10. steven

    The one small bit of upside is the commodities price crunch will take some wind out of Elon Musk’s sails. But smaller fry will suffer.

    It ought to completely deflate them. The next big thing is ‘bidirectional charging’, a technology that even Ford has only partially embraced with its Lightning. But Musk (not Tesla whose engineers have been pleading with him to include it) refuses to allow it on Teslas because it will interfere with the sale of PowerWalls – and according to Bloomnberg the grid-scale batteries that Musk sees as the next big market.

    It would certainly help but you don’t need standards for vehicle-to-grid to be in place for bidirectional charging to be useful. Just ask people in Texas and California. But Musk’s argument against including it is people will want the freedom to drive their Teslas in an extended power outage.

    1. Peerke

      Interesting that. I heard from our local solar installer that our local utility is looking at battery storage near local distribution transformers since they predict they will have problems meeting demand from car charging in the wee small hours when lecky is cheapest here in Az. Also the street level transformers may have to be upgraded due to the amps needed. I think the Ford Lightning may have scared the beejaysus out of them due to power and battery size. Currently EV owners here in Az are in a sweet spot where if you have solar and a BEV you can charge for nothing. Anyone with a large roof and a Lightning would be able to operate the truck free of charge (pardon the pun)

  11. Naomi

    The Bidenfetishists around here claim to be more than willing to stay home, or glady pay $8 a gallon, to help “the war effort”.

    Never in my long life have I seen people more propagandized. The Global Elite must really be desperate to pull something off here.

    1. Blue Duck

      Driving around Sonoma county today, you’d think this place was a part of Ukraine with all the Ukrainian flags hanging around. Don’t let on to the msnbc worshipping residence of Sebastopol that their perfect little liberal paradise is named after a Russian port…

  12. Matthew G. Saroff

    It should also be noted that a lot of the rail freight traffic in Europe is diesel electric locomotives.

    1. atharvaveda

      Yes, but actually much less so than in the United States. Most parts of Europe have extensively electrified railways. The higher fuel costs for trucks are going to be far more significant, especially in Germany where long range transport of containers on diesel-powered trucks on the motorway system is a lot more preeminent than it should be, compared to consolidated transportation of these containers on electrified railways.

      1. Polar Socialist

        According to the European Rail Industry Association 50% of the tracks are electrified. 80% of the traffic is using electric traction, though.

        Which obviously means that some parts of the rail network are used much more than the others. So there may be issues with the capacity of certain lines to absorb more traffic.

        1. PlutoniumKun

          Rail is far more efficient in energy use per mile so rail freight is much less vulnerable to rising diesel or electric prices.

  13. ghiggler

    The Investing News pages on lithium production and reserves by country, in gigatons:

    Country Production Reserves
    Australia —— 40 —– 2,800
    Chile ———– 18 —– 9,200
    China ———- 14 —– 1,500
    Argentina ——- 6 —– 1,900
    Brazil ———— 2 ——— 95
    Zimbabwe ——1 ——– 220
    Portugal ——– 1 ——— 60
    US ————— – ———750
    Canada ——— – ——– 530

    Reserves are about 200 times annual production.

    The worlds biggest reserves are in in the Chile-Argentina-Bolivia triangle which currently is second in production.

    Australia is the world’s largest producer of lithium, most of which goes to China. It has the world’s second largest reserves, but even together with China is a distant second.

    China is the world’s third largest producer of lithium and it is by far the greatest producer of graphite in the world. Together with Australian lithium this provides a commanding lead in battery production.

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