Will the West's oil price cap on Russia increase the price of oil?

Laurie Meadows
06 January 2023
last edited 26 April 2023 2244 UTC

Insurance    Shipping  The rise of Middle East and Asia-Pacific oil storage and marketing hubs

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Russia's view of a buyer 'price cap' imposed on Russian commodities

Russia's Retaliatory Ban

Who holds the Joker?

In early September 2022 the G7 countries - Japan, USA, Italy, France, Germany, Canada, and UK (oil buyers) - plus the EU member countries, plus Australia,  agreed they would 'cap' oil prices, and that any 'friendly country' buying oil from Russia would have to provide documentary evidence to shipping insurance companies that the price they paid to Russia for the oil was lower than the cap. This 'cap' is due to start on December 05, 2022. The 'cap' will be set slightly higher than the Russian 'tax paid, all costs, break-even cost', which is around $20 to $44 a barrel depending on assumptions used. As at 29 November 2022 the actual figure is still being discussed by the EU, but the most quoted numbers are around $60 to $70, while the most rabid EU members were holding out for $30 or so. [update: final decision made]

""Moscow is working on mechanisms to ban the application of the price ceiling for Russian oil, regardless of the established level"
Russia Deputy Prime Minister Novak

We await Russia's response. I suspect it will be more than adequate. Yet another hole will appear in the West's foot.

Whatever the final price cap, the ability to enforce it is key. Enforcement will be through control of tanker insurance. Importantly,  a UK - based insurance association (International Group of Protection & Indemnity Clubs) dominates global shipping insurance - in fact 95% of global shipping is covered by association members (most of whom are Anglo Saxons).

In principle, Russian oil could be bought by independent countries (such as India) that refuse to impose West's 'sanctions'. But as oil can't reach India by pipeline, it has to be shipped. Oil tankers won't operate without insurance against oil spills, accidents, piracy, and so forth. As almost all ship owners and charterers use the IGPI for insurance, and IGPI is bound to obey the new EU 'sanctions', then no insurance will be available to ships from any nation that don't apply the West's price cap - whether party to the West's restriction or not. Very clever. Russian oil can't be delivered, whether to India or anywhere else.

Or can it?

Russia needs 4 things. The first thing Russia needs is customers for its oil.

"Russia will embargo countries that support the Washington-proposed price cap on its oil...In my opinion, this is a complete absurdity… To those companies or countries that will impose restrictions, we will not supply our oil and oil products, because we are not going to work under non-market conditions”
Deputy Prime Minister of the Russian Federation Alexander Novak 01 September 2022
The rise of Middle East and Asia Pacific oil storage and marketing hubs

Russia won't supply oil to anyone trying to apply a price cap.

That means that on, or sometime after, February 1 2023, Russia will not supply oil (or diesel) directly to Australia, or to Europe, Russia will not supply oil (or diesel) to USA, and Russia will not supply oil (or diesel) to the UK. Russia will not supply oil (or diesel) to Japan, Canada. Italy or France.

That 'only' leaves the greater part of the world's population as customers. Russia's oil exports to China have increased. India is a massive new market for Russian oil - in fact it now takes 40% of Russia's key 'Urals' oil. In addition to its domestic market, India probably 'washes' discounted Russian oil and oil products through it's refineries by blending oil products such as Russian origin diesel with diesel from other countries until the blend is 49% Russian and 51% anything else. It is then regarded as 'non-Russian diesel' and is on-sold to Europe and other markets at open market prices.

Malaysia produces 400,000 barrels of oil a day, yet it exports around 1.5 million barrels of crude a day to China. A large part of the crude is obviously Russian and other crudes bought at a discount price and then on-shipped. For example the Feoso Group (Hong Kong) has joint ventures in China, Singapore - and Malaysia. It has a number of oil storage sites, and it's Johor Bahru site in Malaysia a tank farm with total storage capacity of 231,000 cubic metres. This translates to 1,452,990 barrels of oil.Which begs the question. Does Russian oil really unload the equivalent of 1.5 million barrels a day as various Malaysian (and other) tanks farms? Or does it simply on-ship it direct to China.

Possibly the answer is in the stocks and flows of oil tankers of various sizes. These complexities require a great deal of planning and coordination, and once in place, a trading system such as this is unlikely to be changed on a whim. Malaysia's state owned Petronas has a vast refinery, petrochemical and product storage facility (Pengerang) in Johor. It is a sheltered deepwater facility built to be an oil and gas hub between the Middle East and China. As an oil importer, it will be very pleased to receive discount oil from Russia. Perhaps it has signed a long term contract - Petronas has already signed a 20 year contract with USA for natural gas, so long term contracts for Russian oil would fully fit in with their 'strategic oil and gas hub' strategy.

In any event, oil demand is picking up post covid. The Middle East, and particularly the UAE, is becoming a storage and market hub for Russian oil and oil products bound for Asia. Russian oil traders are leaving Switzerland and relocating there. Russia may end up with a slightly smaller market, but it will be enough. It is clear the Western world (at least) is heading for a recession, perhaps even a depression, as so much credit has been emitted to cope with covid, and to pay USA for weapons to send to Ukraine.

The 'friendly' countries are happy to receive discounted Russian oil (and fertiliser) as this helps reduce the effect of inflation in these often unstable economies. In contrast, years of neglect have meant the cost structure for energy (including decommissioning obsolete nuclear plants) in the 'developed' West has gone through the roof as the West, in it's radiant brilliance, has simply refused to accept cheaper Russian gas. Soon, they will refuse to accept 'seaborne' Russian oil and oil products.

The western 'brains trust' has also refused to buy Russian and Belarusan fertiliser. The US instigated proxy war on Russian has resulted in disruption to feed meals for European cattle and chicken raising industries. Once again, European prices for fertiliser and food go up due to their European politician's maliciousness and stupidity, while the USA is more or less self sufficient in these areas and therefore less affected. The undeveloped countries are also impacted by fertiliser costs and shortages, but it is becoming clear that Russia will preferentially supply these countries.

Taken together, these factors create an unassailable argument for a committed core of non-Western countries to turn first to Russia for oil and fertiliser. This is called 'customer loyalty', as the Europeans will belatedly learn. Russia has turned it's back on the West.

"Why should Russia maintain oil production of 10 million bpd if we can (more) effectively consume and export 7 million-8 million bpd without losses to the state budget, domestic consumption? Which is better - to sell 10 barrels of crude for $50 or 7, but for $80?"
Leonid Fedun, Vice President Lukoil 30 May 2022

The second thing Russia needs is a profitable market. For various reasons, oil is already in tight supply. Diesel, essential to truck transport, is even tighter. The European portion of the OECD countries import about 1.5 million barrels a day of oil products from Russia - most of which is diesel and diesel precursor. For the moment, oil products are not restricted - because the west, and especially USA, needs it. That changes in the EU on February 5 2023, when the EU bans seaborne oil products from Russia (albeit the EU's 'transition period' allows imports until April 2023). Russia has already said it will stop supplying oil products to countries that place a cap on the market price of crude oil. There will be no lack of alternative markets.

Demand in the Asian market is growing. For a variety of reasons, global oil refineries barely keep up with the demand for 'middle distillates' - diesel, jet fuel, fuel oil. The price of these products is going up and up as rate-limited throughput creates bottlenecks in supply.

The 1.5 million barrels a day that will be diverted from Western markets will be snapped up elsewhere at a very good price (for Russia). In April 2023 India bought 70% of Russia's Urals oil. This massive shift to the vast Indian market is likely to be permanent.

Russia needs relatively high priced oil to make up for any reduction in it's market size. If the market is tight, Russia can sell a smaller quantity of oil at a higher price - and make as much money as they did before the West's 'price cap'.

The third thing Russia needs is ships to carry the oil. As at August 2022 Russian-owned oil tankers are said to carry 19% of Russia's oil exports, and Chinese tankers carry about 6%. Greek-owned tankers carry most of the rest. Tankers flying 'flags of convenience', such as Liberian tankers, can be chartered. Russia may simply buy tankers to meet its (reduced) export needs.

“If you look at how many ships have been sold over the past six months to undisclosed buyers, it’s very clear that a fleet is being built up in order to transport this...”
Christian Ingerslev, CEO Maersk Tankers A/S 24 October 2022

Russian tanker fleet is mostly owned by Sovcomflot, a state owned entity. In June 2022, almost 80% of the SCF fleet was at anchor, due to lack of insurance and other difficulties. Some ships were put up for sale. I can guess - and it is only a guess - that there has been a dramatic revision of the strategic business in the ensuing months, with new structures, new investors, new insurance.

An oil cap would alter the flow of about 55 million barrels a month, much more if landlocked Kazakhstani oil exported through Russian Black Sea terminals are included (84 million barrels per month).

Russia's Unipec alone has chartered more than 10 tankers to carry additional Russian oil to China 'the long way around'. Currently the smaller Aframax tankers predominate, as distances were shorter. But now larger more and larger tankers will be needed to cover the longer distances to India and to China. Industry analysts estimate the additional volumes will require 30 Aframax tankers, 50 Suezmaxes and over 40 'very large crude carriers' (VLCCs). Russian Urals crude is exported mainly through the big Baltic Sea oil exporting ports (Ust-Luga and Primorsk), and these ports cannot accommodate VLCCs anyway - typically Suexmaxes are the largest ships they can handle. (Some Urals crude  is also shipped through the Black Sea from the port of Novorossisyk). Larger cargoes on VLCCs bound for the long haul to Asia are filled via ship to ship transfer offshore Europe (offshore Demark or Italy), usually small Aframax to a VLCC. The VLCCs then sail via the Mediterranean and Suez canal to Asia, with most with a final destination in India. A smaller number sail for China (and perhaps Malaysia), but China all but monopolises Russian oil exports from Russia's Pacific coast.

There is an existing so-called 'shadow fleet' of oil tankers, many of them VLCC class, carrying Iranian and Venezuelan oil outside the Western controlled shipping insurance and port handling system. These tankers are ideal for long journeys and deep water ports in the Asia Pacific region, and also the Middle East. This fleet is now expanding to include smaller tankers that can access Russia's Baltic ports.

"...while Europe happily purchases "banned" Russian oil and gas resold from India and China (at a huge markup), its actions have served as a gold mine for a creaky - literally - subsector of shipping, and as Western shipping and maritime services firms now steer clear of Russian oil to avoid falling foul of sanctions or harming their reputations, new companies have leapt into the void, and they're snapping up old tankers that might normally be scrapped.

As Reuters reports, ageing tankers have been sold in recent months by Greek and Norwegian owners for record prices to pop-up Middle Eastern and Asian buyers taking advantage of sky-high charter prices for vessels willing to ship Russian oil to India and China...with new entrants keen to get a slice of the Russian business, second-hand oil tanker prices have surged, especially for Aframax vessels that can carry up to 600,000 barrels, the standard size used for loading crude at Russia's Baltic ports...The price tag for 20-year-old Aframaxes has jumped 86% from $11.8 million on Jan. 1 to $22 million now, according to valuation company VesselsValue....

...some of the vessels involved in shipping Iranian and Venezuelan oil were shifting to transporting Russian oil.It estimated that the so-called shadow fleet shipping oil from those two countries and some of them also for Russia was made up of 107 Aframaxes, 65 larger Suezmaxes and 82 VLCCs"
ZeroHedge 7 December 2022

Chokepoints in seaborne oil supplies. Source: U.S. Energy Information Administration (Jul 2017).

It is not usually economic for China to import Russian crude in an Aframax as the lower capacity pushes up the per-barrel cost, but with Russia selling oil cheaply to 'friendly' counties such as China and India, the economics changes. Aframax loads to Asia are now profitable, at least while the discount margin is so wide.

As at early 2023 China and India take around half of Russia's crude oil exports. India has already increased it's Russian oil imports to 900,000 b/d from 30,000 b/d in 2021, and at concessional prices, this is likely to increase. This re-direction of Russian oil flow means Europe will have to import oil from much further afield, either West Africa or . The average tanker journey from Russia to Europe is 8 days, while a trip from Baltic fields to India is about 22 days, and from the Black Sea to India takes even longer - about 30 days. Baltic Sea to China is about 37 days, but via the Black Sea takes 45 days. Extra days sailings now required - the opposite of 'green transport' - means extra days at sea compared to before the restrictions, and that means extra ships are required. The residue of scarcity of anything,
ships included, is, of course, higher prices.

This does suggest there will be a period of 'juggling' around the availability of various classes of tanker needed for the long journeys to carry Russian crude to West Africa, India, and China. And temporary shortages of tankers. Even with refurbished 'old' tankers opportunistically entering the market, some new tankers may need to be built to plug gaps. Europe will be in the same dilemma. No matter how you look at it, the EU restrictions increase the price of Russian oil sailing past Europe to much further markets, and increases the price of oil shipped from far distant sources to Europe.

Russia can cut the distance to a limited extent by using the Arctic route to Asia. In November 2022 Russia 'pioneered' the shipment of Arctic Sea crude, using a specially built icebreaker tanker to cover the 5,300 kilometer journey from Russia's Murmansk to the Chinese port of Rizhao (620 km north of Shanghai). The trip is about 40 days there and back in good conditions. Russia's largest oil terminal is being built at Sever Bay in the far North. This will export oil from the Vostock fields currently being developed, with an anticipated production of 500,000 barrels a day. Once again, the Arctic route will be used, and obviously this means further expansion of Russia's icebreaker tanker fleet. Insurance in this fragile environment will be stratospherically high. Once again, this must affect the price of the oil carried.

Even the usual anonymous US officials acknowledge Russia will 'probably' be able to ship almost all its own oil in its own tankers, (owned or leased), covered by its own insurance. In addition, Russia has start building its own Aframax class tankers, using pre-built modules imported from China and South Korea. The first tanker was completed in April 2023, and 3 more are on the way. As a start.

The EU plans to prohibit EU 'operators' from "
financing, insuring, and servicing" any vessel "flying the flag of a third country" for a period of 3 months AFTER their oil is unloaded in an EU port. In the extremely unlikely event it is an EU flagged vessel, it will be punished by EU regulations. Sailing times will now be so long that it is conceivable that some slower tankers could ignore the restrictions and deliver oil products to Europe, 'take the 90 day hit' after unloading. A journey to a friendly country later (plus travel time for the next load pick up and delivery) and they would be out of the 90 day restriction and ready to deliver 'naughty Russian oil' to Europe again.

There is one problem. It won't be loaded in Russia - they won't supply it to Europe, whether directly or indirectly through third parties. Russian oil and oil products will be sent to China, India, Qatar, the UAE, or Malaysia. They can be on-sold (including to Europe) but only with contracts that do not include the price cap. By then, the tanker charter rate will be eye watering. What will that do to European oil prices?

The fourth thing Russia needs is fully insured ships (whether owned by Russia or chartered). There is no reason why Russia cannot use state entities to fully underwrite oil tankers. After all, oil, gas, and wheat are strategic industries, and as such, are already majority controlled by the Russian government. State-owned Rosneft already produces 40% of Russia's oil, and it has recently moved into the tanker charter business. It is a natural fit to also do insurance.

"Despite its initial concerns, government-owned reinsurer GIC Re will help establish an INR5 billion (SG$88.7 million) insurance pool covering India’s imports from Russia.

While officially known as the fertiliser pool, it may also be used to insure risks of oil and gas importation from Russia, Business Standard reported. GIC Re will contribute around 40% of the pool, while the rest will be from an assortment of Indian insurers, including several government-owned ones."
Insurance Business Asia 22 June 2022

The UK realised it was losing insurance business, and made a futile attempt to rescue some of the lost business. But Russia blocked their move.

In early August 2022 the UK removed sanctions on insurance and reinsurance of ships carrying oil to third countries (not the the EU). The UK is the single major ship insurer in Europe. Russia has made it illegal to insure with 'unfriendly countries' anyway, and has developed it's own insurance businesses for it's own ships. For example, State-owned Sovcomflot, Russia's biggest shipping company, now insures it's own fleet itself. through 'Russian National Reinsurance Co'. (also state owned). The Russian National Reinsurance Company has become the main reinsurer of Russian ships.

It must be obvious to the free-trading world that they are vulnerable to being blackmailed by the US and the UK, who together have the power to withhold shipping insurance on any pretext they invent.

Russia's trading partners could spread risk by investing in re-insurance opportunities themselves. Russia has made it illegal to insure with 'unfriendly countries' anyway. Both China and India already provide state insurance for cargoes of oil they buy from Iran and Russia.

India's government-owned insurance company, the General Insurance Corporation of India, writes reinsurance for cargoes inward bound to India. It has a fully-owned Russian subsidiary. While the Indian company is said to have a 60 million self-funded pool that is inadequate for a major disaster (the Exxon Valdez supertanker, which in 1987 grounded on a reef, causing a major oil spill, cost $780 million to settle - about $1.8 billion in today's dollars). India also draws on the global reinsurer pool - mainly Anglo Saxon - to further spread risk and to offer insurance for high cost but low-likelihood major claims. Whether this pool is closed to reinsurance for Indian insurers who might chose to insure imports of Russian oil to India (or elsewhere) remains to be seen.

As of February 2023, Russian supplies of crude to India had increased from 1% of India's imports to 35%. The crude is mainly shipped on Russian tankers, and insured by Russian insurers - thus avoiding the insurance problem. Naturally, the Indian importer pays the cost of these services, and Russia benefits by its expansion into the shipping insurance business.


Short term, oil product prices will tend to be volatile.

Absent a major depression destroying world demand for oil, petrol and diesel will never be cheap again.

Food will never be cheap again.

, Russia will stop supplying cheaper pipeline oil to Europe (except Serbia and maybe Hungary). Europe will have to import oil from the Middle East or West Africa - a longer route and therefore more expensive.

Second, supply of products such as diesel will be more volatile. For example, Russia is a major supplier of diesel to the US East coast because US oil refineries in the east that used to produce diesel have closed down. Without Russia, the US East coast will have to import from elsewhere, but supply from 'elsewhere' can be uncertain. Worse, New England (in particular) has insufficient gas pipeline to power both home heating and electricity generation plants - and so they have to use diesel fuel oil when wind and solar are insufficient (such as in winter). Electricity prices then become extreme.

“The competition for non-Russian diesel barrels will be fierce, with EU countries having to bid cargoes from the US, Middle East and India away from their traditional buyers”
IEA November 2022

China sharply cut its exports of middle distillates such as diesel last year, but now that the geopolitical situation on Russia's western border reaching a stage of predictability, if not inevitability, China has likely filled it's very large strategic oil reserve with cheap Russian oil, and has now released large quotas of diesel onto the world market. If this was one result of the recent bargaining between the leaders of China and the US, then this emphasises the unpredictable geopolitical dimension of volatility. This is hardly a replacement for the highly reliable regular supply of diesel from Russia.

This increased price and availability volatility for US truckers is 'volatility of choice'. The US politicians didn't have to do this to US transport businesses. But they chose to do it anyway, to fit their hybrid war on Russia, a war no American voted for, and a malicious war of choice that America is doomed to lose.

"As for green energy, let me repeat that everything needs to be prepared for this before a final transition.

Systemic measures limiting the development of traditional energy sources have triggered this serious crisis. There is no funding; banks do not give loans either in Europe or the United States. Why is everything limited? Banks do not approve loans, do not insure, do not allocate land. Transport is not upgraded for oil and gas shipping, and this has continued for years. Considerable underfunding in the energy sector has led to shortages. This is what happened.

The United States is allocating oil from its strategic reserves – well, this is good, but they will have to be replenished and the market analysts understand this. Today, they have withdrawn oil from strategic reserves and tomorrow they will have to buy it again. We are hearing that they will buy when prices go down.

But they are not going down
. So what? Wake up! You will have to buy at high prices because prices have gone up again.

What do we have to do with this? These blunders in the energy sector were made by those who have to think about it and deal with it."
Vladimir Putin 27 October 2022

Third, looking longer term, in line with the EIA policy, people in Europe will demand money be allocated away from conflict with Russia and to rapid electrification of public and private transport, they will insist on Russian gas for industry and baseload power while also diversifying suppliers via south European pipelines, demand highly efficient small nuclear reactors be built, and demand massive acceleration of programs to capture excess solar and wind power for later use.

Fourth, In the US, people will finally come to understand that the USA is now a nett crude oil importer.

US 'conventional' crude oil (and condensate) has about peaked. True, there are increasing volumes of 'oil' condensing out of natural gas fields (this form of 'oil' went from negligible amounts in 2010 to an astonishing 22% in 2022), but these volatile liquids are too light. When refined, they produce volatile light products such as propane, butane, ethane etc. They don't produce the vital and 'heavier' middle distillates, such as diesel, jet fuel, and fuel oil. Previously, USA imported heavy crude from Venezuela, but after failing to overthrow the legitimate government and install their own puppet, the USA government imposed crippling 'sanctions' on Venezuela (although in early 2023 the US government licenced 3 US oil companies to import 100,000 barrels of Venezuelan heavy crude). Absent further imports from Venezuela, USA's energy security is now highly reliant on Canada to provide the heavy oil to mix with the light shale condensates. That heavy Canadian oil is expensive to produce, and expensive to rail across vast stretches of the American continent. Liquid condensates are also expensive to produce. Expensive to drill, expensive to store (they re-gasify at normal temperatures and must be cold-stored), expensive to maintain production, and expensive to cap when the well is exhausted. It is also worth noting that a barrel of light liquids has a lower energy content than a barrel conventional crude oil.
The 'engine' of liquid condensate production is to a great extent natural gas production. Light liquids, while a by-product of the natural gas production industry, are valuable. But the US has to be able to sell the natural gas in order to keep the liquids flowing (and the US 'oil' production statistics up). About 20% of US natural gas is exported, about half to Mexico and Canada, the other half shipped as LNG. The USA has largely removed cheaper Russia natural gas from the European market, but it can't do the same to Middle East producers (unless it blows up the LNG tankers that transport their gas, or sabotages their undersea pipelines coming from the gas fields to the processing plants). The US will have competition, and if natural gas sales slow, liquids also slow, and the US will have to import more crude - especially middle distillates.

There are increasing volumes of natural gas liquids being produced around the world. The USA exported very small amounts of gas liquids in 2010, but now exports about 2.3 million barrels a day. Those countries that produce both light liquids from natural gas wells and also produce heavy oils that can be blended into them have a natural advantage. Russia is one such country.

"That's partly a function of the pandemic, after lockdowns destroyed demand and forced refiners to close some of their least profitable plants. But the looming transition away from fossil fuels has also dented investments in the sector. Since 2020, US refining capacity has shrunk by more than 1 million barrels per day. Meanwhile in Europe, shipping disruptions and worker strikes have also eaten into refinery production."
 - Bloomberg

All against a background of American oil businesses that are unwilling to invest much in new refineries, closing older refineries, and re-purposing other refineries so they can deal with biofuels and plastic re-formatting. And there is no central body in charge, these are private-capital refineries, and act in the shareholders best interest - not the public's. Weighing on oil company executive's decisions in the European context is that the European Union intends to convert some natural gas handling facilities to hydrogen gas production facilities (processed from natural gas). The hydrogen will then be fed through fuel cells and similar conversion technologies to transform into electricity for baseload power when solar and wind and hydro are insufficient. All to help support the move to electric cars. What oil company executive would commit large amounts of capital in an oil refinery when petrol and diesel production seem to have a limited future? 

Fifth, the EU and USA, if they persist with this 'price cap' plan, will, in effect, remove Russian pipeline capacity as well as actual crude oil and oil products from Europe. As a result, other European pipelines will become chokepoints for supply in sufficient volumes, as will lack of European port oil terminal unloading and tanker farm capacity.

Lastly, if Russia is forced by the West to rebalance it's trade and turn to 'the rest of the world' as reliable business partners, petrol and diesel prices in the West must increase in price. Prices are likely to be volatile for some time, until the West's farcical plans are finally abandoned.

I am confident that the EU and US will come up with some convoluted face-saving scheme to abandon their foolish plan, but however it is sold, the West's oil price cap will be shelved.

Russia's view of a 'price cap' imposed by some countries on Russian oil

"Look, they are trying to put a price cap on energy resources, on oil and gas. Who produces them? Russia, Arab countries, Latin America, Asia, Indonesia, Qatar, Saudi Arabia, the UAE produce oil, too. The United States produces both oil and gas, but they consume everything: they have little left for the external market. That is, it is produced in those countries, but consumed in Europe and in the United States.

I believe that what they are trying to do now is a remnant of colonialism. They are used to robbing other countries. Indeed, to a large extent, the rise of European countries’ economies is based on slave trade and robbery of Africa, Asia, and Latin America. To a large extent, the prosperity of the United States grew out of the slave trade and the use of slave labour, and then, of course, as a result of the First and Second World Wars, which is obvious. But they are used to robbing others. And an attempt at non-market regulation in the sphere of the economy is the same colonial robbery, or, in any case, an attempt at colonial robbery."
- Vladimir Putin 22 December 2022

Playing the joker

The joker is OPEC+ policy. OPEC+ may decide that no OPEC+ member may sell oil to any country that interferes with market pricing by imposing buyer price caps.

"...just balance the books, they want to ensure a steady stream of surpluses,” said Robert Mogielnicki, a senior scholar at the Arab Gulf States Institute in Washington, adding that the kingdom “would like to see prices moving closer to the high $90s.”

Saudi Arabia has the lowest oil extraction cost in the world, at around $3 per barrel. That means the vast majority of the revenue earned from each barrel goes into its coffers. And those funds are needed to finance everything from futuristic trillion-dollar cities in the desert to a sizeable government wage bill, despite the introduction of new taxes in recent years and attempts to diversify the economy.

“The high price [needed to balance the budget] is because of the large spending on government services, infrastructure investment, public sector, etc,” said Omar Al-Ubaydli...conventional tax instruments are largely absent, especially personal income tax.”
CNN 7 October 2022

In 2019 Saudi Arabia needed an oil price of around $80 to $85 to balance it's budget. That has changed slightly - 2022 saw Saudi Arabia with a budget surplus for the first time in 8 years -  but Saudi budget-balancing oil target price is is now $79. But that does no more than balance the books. Saudi needs a good surplus to invest further in non-oil commercial activities. Anything that might act to suppress the price of oil is antithetical to their interests. A severe economic recession depresses demand for oil, reducing the price - and price-capped Russian oil would push it down further.

The price of oil now depends on the health of the global economy. Perhaps there will be two economies, an east and a west. One thriving on discounted Russian oil, the other forced by Saudi Arabia and OPEC+ to pay a much higher oil price on the open (non-contract) spot market.

Latest updates - most recent on top

Oil Price Cap Update 27 December 2022 : Russia's retaliatory ban

The Russian President signed the 'Executive order on special economic fuel-and-energy measures in response to the price cap on Russian oil and oil products established by some foreign states'. The main part of the text is reproduced below from the official Russian English-language website:

"Executive order on special economic fuel-and-energy measures in response to the price cap on Russian oil and oil products established by some foreign states

December 27, 2022

This Executive Order was signed in response to the unfriendly actions taken by the United States, other foreign states and international organisations that sided with them, to establish a price cap on Russian oil and oil products, which is in violation of international law.

The Executive Order is aimed at protecting the national interests of the Russian Federation and is in compliance with the following federal laws: No. 281-FZ On Special Economic Measures and Coercive Measures of December 30, 2006, No. 390 FZ On Security of December 28, 2010, and No. 127-FZ On Measures Impacting (Counteracting) the Hostile Actions of the United States of America and Other Foreign States, dated June 4, 2018.

The Executive Order has established that in connection with the ban imposed by the United States, and other foreign countries that sided with them, on the transport of Russian oil and oil products and related services, which is applied if the price of Russian oil and oil products is above the limit established by said foreign states (price limit mechanism), Russia bans the sale of oil and oil products to foreign companies and individuals if the contracts on these sales include the use of this mechanism directly or indirectly. The established ban applies to all stages of sales up to and including the final buyer.

The ban on Russian oil sales established by the current Executive Order becomes valid on the day of its entry into force.

The ban on sales of Russian oil products, as established by the current Executive Order, is to be applied on the date determined by the Government of the Russian Federation but no earlier than the date of its entry into force.

Russian oil and oil product sales, that are banned by the Executive Order, may be carried out under a special decision of the President of the Russian Federation.

The Government of the Russian Federation has been given related instructions.

The Ministry of Energy of the Russian Federation was instructed to monitor compliance with this Executive Order based on a procedure to be determined by the Government.

The Ministry of Energy of the Russian Federation was given the right to release official statements on the uses of the Executive Order with approval from the Ministry of Finance.

An interdepartmental working group on issues related to fuel-and-energy activities was charged with ensuring compliance with the Executive Order.

This Executive Order enters into force on February 1, 2023 and will be valid until July 1, 2023. "
27 December 2022

It's important to note that the ban only applies if the sale price is above the limit set by the unfriendly states. At the time the Executive Order was signed Russian oil was selling at a price less than the price cap, and so neither the West's ban or Russia's retaliatory ban would apply. The price of crude will probably be higher by 1 February 2023 when the Russian ban comes into force.

There is no set date for the Russia's ban on the sale of oil products, such as diesel, to be introduced. It is up to the Russian Government to decide, but it can't be earlier than 1 February 2023. This move introduces a lot of uncertainty into the market for diesel and jet fuel (in particular). Even if Russia does nothing, this uncertainty is bound to spike diesel prices up in the short term.

The ban also prohibits sale of oil and oil products at " all stages of sales up to and including the final buyer". This provision prevents countries from buying Russia oil or diesel and simply reselling it. It would probably have to be diluted with other countries crude or diesel to, I guess, 51%, when it is arguably no longer a "Russian" oil procust.

Oil Price Cap Update 6 December 2022 0155 UTC

"A traffic jam of oil tankers has formed in Turkish waters after Western powers imposed a “price cap” on Russian oil and Ankara demanded insurers guarantee that any vessels navigating its straits were fully insured...In light of the price cap, four oil industry executives said Turkey had demanded new proof of insurance....19 crude oil tankers were awaiting passage through Turkish waters on Monday. The ships had anchored near the Bosphorus and Dardanelles straits, which connect Russia’s Black Sea ports to international markets... the International Group of P&I Clubs...stated on Monday that the Turkish request went “far beyond” the general information normally required...Russian insurance companies provided letters of confirmation to Turkish authorities in order to secure passage through Turkish waters. The shippers with insurance from western providers were the ones being held up, according to the source." Full story at AZGeopolitics

It appears from this article that Kazakhistani oil is not affected by the restrictions, even though it is shipped from a Russian port (same applies to some Azerbaijani and Turkmenistani oil piped to Russian Black Sea ports). It is quite obvious from this delay/blockage of Kazak oil that Turkey has extracted some sort of concession from Russia to Turkeys economic advantage.

Oil Price Cap Update 5 December 2022: The EU price cap for Russian crude came into effect today (the oil product cap doesn't come into effect until February 5th 2023, ? with a transition period until April).

Oil Price Cap Update  3 December 2022
: The EU Oil price cap finalised

The EU has decided on a price cap of US$60. The cap will be reviewed every 2 months and adjusted to remain 5% below the International Energy Agency benchmark.

The IEA's mission statement says 'The IEA is committed to shaping a secure and sustainable energy future for all'. Member countries must have a program in place to reduce national oil consumption by up to 10%. No problem... This decision will be formally announced in a few days time. The US plan to collapse European industry continues to play out.

Oil Price Cap Update 28 January 2023: The EU is mooting a 'price cap' of $100 on Russian oil products, at a time when diesel is selling into the EU at around $110 to $120 a barrel. The G7 would like it a little higher ($100 - $110). The EU has stocked up on diesel from USA and Saudi Arabia - and Russia - ahead of the kick-off of the ban on Russian seaborne oil products that don't comply with the EU 'price cap'. As a result, Russia's diesel exports hit a multiyear high. According to oilprice.com the EU ban applies to about 1 million barrels a day of oil products (diesel, fuel oil, jet fuel etc). As the major Russian oil product imported by the EU is diesel, this increased demand will drive diesel prices up.

Oil Price Cap Update 04 February 2023: The EU introduced a 'price cap' of $100 on Russian 'premium' oil products, such as diesel and jet fuel. The EU introduced a $45 price cap on Russian low value oil products, such as naptha. The price cap comes into effect on Sunday 5th February, and will be followed by a 55 day 'transitional period' for seaborne cargoes that were loaded before the 5th of February and reach their 'final destination' before April 1st.

February 5th is also the date that all EU companies will be banned from providing any form of finance or servicing to anyone transporting petroleum products to any country that is not interested in applying the EU's own blockading laws to their own sovereign affairs.

Russian non-supply to those who cap prices Update 10 February 2023: Russian oil production will be cut back by 500,000 barrels a day in March 2023. According to energyIntel export volumes of crude will probably remain the same, but supply to Russia's domestic refineries reduced. They claim that some Russian refineries are shutting down for seasonal maintenance anyway. Russia's domestic refineries have largely been configured fully supply Russia's gasoline and diesel needs, and export about half their excess diesel production.

"As of today, we are fully selling the entire volume of oil produced; however, as previously stated, we will not sell oil to those who directly or indirectly adhere to the price cap principle. In this regard, Russia will voluntarily reduce production by 500,000 bpd. This will contribute to the restoration of market relations..."
- Deputy Prime Minister Alexander Novak 10 Feb 2023 

If Russia's rule refers to blending Russian oil products with oil products of other nations AND is able to enforce sale of such blends only to friendly countries, then it will probably be able to 'short' the supply of diesel to the EU. Obviously, if sale of Russian oil and oil products is, in effect, prohibited from sale to Europe, then it will drive up the price of non-Russian diesel. According to Alexander Novak Russian oil production was 9.8-9.9 million barrels a day the last few months despite the sanctions.

Oil Price Cap Update 10 March 2023: "New York is buying an unusually large amount of gasoline and diesel from India — a country that has become a top outlet for sanctioned Russian oil. " Bloomberg

By January 2023 the east coast of USA was importing 89,000 barrels per day of 'Indian' gasoline and diesel. Normally India would provide 5% of New York supply - in January 2023 it had increased to 40%. Bear in mind India is, like the USA, a nett oil importer, so the crude from which these products are refined must have originally come from an oil exporting country.

Index of Laurie Meadows articles on Security