Canadian guilt, Russian oil

We Canadians are overwhelmingly pro-Ukraine and anti-Putin, so when the CBC published an expose last week about "banned Russian oil" sneaking into Canada, it was read in despair by most of us. What an awful failure of Canadian sanctions policy. 

As with a lot of sanctions coverage, I saw things a bit differently: "Not bad. We're doing our part!" That's because if you add some more context to the CBC article, the data that it presents can be read as good news.

The article takes issue with 2.5 million barrels of refined oil products made from Russian-produced crude that have been indirectly imported into Canada since the start of Putin's invasion of Ukraine in 2022. Given that around 1,000 days have passed since the invasion, that works out to roughly 2,500 barrels per day of Russian-linked refined oil products arriving on Canadian shores. (Analyzing oil flows on a per-day basis is industry standard and also makes it easier for our brains.)

In the grand scheme of things, 2,500 barrels per day is a drop in the bucket. Canada consumes around 1.6 million barrels of refined oil products per day, according to CAPP, which includes stuff like gasoline, diesel, and jet fuel. So just 0.1% of our consumption is Russia-tainted. Even so, every barrel matters, and we should strive to avoid any contribution to Putin's war chest.

But there's more context. 2,500 barrels per day of Russian refined oil products is far less than what we imported prior to the war. According to the Canada Energy Regulator (CER), between 2017 and 2022 Canada was regularly importing around 10,000 barrels per day of refined petroleum products directly from Russia (see chart below). After banning imports of Russian crude and refined oil products, Canada's direct imports fell to zero in 2023. Into this void, indirect imports of 2,500 barrels per day of Russian-linked refined products, the flows that the CBC spotlights, have emerged.

A 75% decline from 10,000 barrels per day to 2,500 barrels per day is not too shabby.

Canada's direct imports of Russian refined petroleum products, which hit zero in 2023. Source: CER

2,500 barrels is still not zero. But we can also take comfort from the fact that those barrels are not as profitable for Russia as they used to be. In the pre-war era, Canada was importing refined petroleum products directly from Russia, but in the post-war era we are importing Russian oil indirectly via a third-party, India. More specifically,  oil in its raw form -- crude oil -- is being shipped all the way from Russia to India by tanker, where it is upgraded by Indian refineries, and only then is it onshipped to Canada.

This new workflow is a big downgrade for Russia. Before it can be used, crude oil has to be converted into pricier consumable types of fuel like gasoline for cars and jet fuel for planes. Upgrading crude oil creates extra profits for whoever does it. Russia's refineries used to capture the entire upgrading margin. They refined the raw oil after it was pulled out of the ground and then regularly sent 10,000 barrels per day of the final product to Canada. But now India is capturing those extra profits on the 2,500 barrels per day that are sent to Canada.

So not only has the quantity of Russian-linked refined products imported by Canada shrunk by 75% since the war began, but thanks to the interposition of Indian refiners at the expense of Russian ones, the quality of Russia's revenue stream has been downgraded: pound-for-pound, Russia's indirect exports to Canada are a far less lucrative for Putin than they were back in 2021, because his refining margin has disappeared.

Compounding Russia's woes is the much more circuitous route that its oil must now take. Prior to 2022, Russian refined oil exports were loaded onto boats in Russian ports like Saint Petersburg and shipped via the Baltic Sea to Canada, around 4,000 nautical miles away. That's a 15-day voyage according to Sea-Distances.

These days, that 15-day voyage has tripled, even quadrupled. First, Russian crude oil must travel from the Baltic to India, a 7,500 nautical mile journey that can take 30 days. That's if it goes through the Suez canal. Passing around the southern tip of Africa amounts to a 12,000 mile trip taking up to 50 days. Once refined in India, the product must travel another 8,000 miles from India to eastern Canada. 

What an incredible amount of travel to get a barrel of Russian refined oil to Canadian markets! A good way to visualize these new transportation frictions is provided by the Kyiv School of Economics, which charts the volume of Russian oil being transported by oil tankers over time. Thanks to the forced rerouting of crude to less efficient routes as countries like Germany and Canada close their borders to Putin, Russia's oil on water is 163% higher than the pre-invasion average.

Record volumes of Russian oil on water is not a good thing for Putin. It mean higher transportation costs. Source: KSE

The extra transportation and insurance costs that "oil on water" entails inevitably eat into the final price that Russia can negotiate with buyers like India for its barrels of crude. For these long distances to be financially worthwhile for Indian businesses, they will only buy Russian crude at a discount to the going world price. According to the Dallas Fed, the Russia discount regularly clocks in at around $20 below the market price. This constitutes a big step down for Russia -- prior to the war it was receiving the full world price.

The upshot is that Canadian imports of Russian oil are down, and even though some Russian refined petroleum products are indirectly making their way to Canada, this is only after we've extracted our pound of flesh from Putin by forcing him to give up his refining margin and by obliging him to accept a crude oil price discount on account of distance traveled. So let's take some pride from that.

Does that mean we shouldn't do anything about our indirect imports of Russian oil product?

I want to clarify that Canada isn't importing "banned" products or breaking Russian sanctions. For better or for worse, the coalition's sanction on Russian crude oil have been designed to allow crude to continue to flow around the world, the intent being to avoid a big spike in oil prices while still hurting Russia. The 2,500 barrels of indirectly-refined refined oil we get each day are fair game.   

But that doesn't mean Canadians should do nothing. The CBC article is a good effort to name-and-shame certain Canadian importers that are accepting Russian-linked crude from third-parties, including Everwind Fuel's Point Tupper oil storage facility in Nova Scotia. C'mon, Everwind. Why not choose better trading partners, ones who aren't acting as go-betweens for Putin?

However, the best step we can do to counter Russia is to focus on producing more renewables, crude oil, and other commodities, as well as to find reliable ways to get these resources to market. 

Unlike Europe and the U.S., which have plenty of economic and financial heft, Canada doesn't have any sizable economic chokepoints that we can lever to hurt Russia. We could cut down on the 2,500 barrels per day of Russian-linked oil imports, but as laudable as that might be it doesn't constitute a genuine chokepoint. Canada's edge is that our economy is remarkably similar to Russia. Both of us extract a bunch of resources. The more we compete with Putin in resource extraction, the more we reduce the prices he relies on, thus impairing his ability to fund his invasion of Ukraine.