Will the West's oil price cap on Russia increase the price of
oil?
USA is now a nett
crude oil importer
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' countries 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.
As at 2024
S&P Global estimated that Russia was using 184 of its own or
foreign flagged small medium range tankers, 46 Panamax tankers,
260 Aframax, 84 Suezmax, and 12 Very Large Crude Carriers
(VLCCs).
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.
In early 2025 the Europeans and Americans leaned on Panama to
de-register some Panamanian flagged ships used by Russia. Trump
issued further generalised threats to impose tariffs on 3rd
countries served by Panamanian flagged ships if Panama doesn't sell
the port concession to a US controlled company. Obviously, Russia
(and other countries, perhaps BRICS countries) may as well create
it's own flagging service, whether the west puts pressure on or not.
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.
Consequences
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.
First, 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.
By March 2025 oil prices were dropping. Spot Brent crude were at
about $74 by late March 2025, down from around $81 a barrel in 2024.
OPEC+ had a production cap in place since 2022, but planned to
remove the cap in April
2025. The Saudis have spare capacity of 3 million barrels a
day, and some of this can be brought to market very quickly if
market conditions are right. But Saudi Arabia - and some other Mid
East oil producers - are running a deficit, so price must balance
between maximising profit and not killing the market in a slowing
global economy.
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
19:05
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