Oil rush: is it possible to reduce russia's income from the energy trade?
And why are not all countries ready to slash production or lower prices?
Plans of the West to cut the putin regime's income from energy exports force the kremlin to step up maneuvers to maintain influence over India and China, the biggest buyers of russian oil. On the other hand, the Western allies hope to achieve the complicity of Delhi and Beijing in limiting the prices of russian oil for a greater effect of anti-russian sanctions.
Mind figured out, what geopolitical trends determine the future of the oil market in the conditions of sanction pressure on russia.
Will oil production be cut?
The day before, it became known that russia opposed Saudi Arabia and other partners in the OPEC+ alliance, who wanted to reduce oil production in order to maintain high oil prices.
According to The Wall Street Journal, today, on September 5, the OPEC+ countries “with a high probability” will decide on stabilising production at its previous level during their virtual meeting. This will be a positive signal not only for russia's geopolitical interests. Support of oil production will also curb the rise in global fuel prices. This will be highly appreciated by Western countries, which continue to struggle with the energy crisis.
Who wants to prevent oil from rising in price?
Another energy front has been opened by the G7 countries, which consider capping russian oil prices as a way to reduce moscow's export revenues without provoking volatility in the global oil market.
On September 2, the finance ministers of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States agreed to such a scheme, which “will develop and expand the effect of the introduced sanctions.” Officials stress that a lot of work still needs to be done before a price cap can be implemented.
The success of this initiative will also depend on the readiness of major importers of russian oil, including India and China, to support the new mechanism. So far, none of them have come out publicly in support.
moscow has warned that it will refuse to supply oil to any country which supports price restrictions. To which James O'Brien, head of the Office of Sanctions Coordination, responded: “russia needs to keep its oil production equipment running, and it needs money. It is up to it to decide what to do with the exports.”
What have the G7 countries already agreed to?
They agreed to introduce a “comprehensive ban on services” related to the sea transportation of russian oil and oil products. These services, including insurance, will only be allowed if hydrocarbons are purchased at a price that will not exceed a level determined by a “broad coalition of countries.” This concept, as noted by the Financial Times, was actively advocated by the U.S. Treasury Secretary Janet Yellen..
Buyers who wish to use the insurance and transport services of the G7 or the EU for the delivery of russian oil must adhere to the price cap. A senior official of the United States Department of the Treasury said that the scheme would provide for the establishment of one price limit for crude oil and two – for petroleum products.
How will capping oil prices influence anti-russian sanctions?
The price cap mechanism will not replace the embargo of G7 on russian oil. It will be implemented simultaneously with the EU ban: from December 5, 2022 – on the import of crude oil and from February 5, 2023 – on the import of petroleum products.
Washington's goal is to encourage as many non-G7 countries as possible to support price caps. But officials stress that even if no other governments approve of the idea, the discount on russian oil will increase. Its buyers around the world are already demanding increased discounts under contracts, as the G7 countries seriously intend to introduce a mechanism of price restrictions for supplies from russia..
“We know from negotiations with other countries that, already now, russia is aggressively promoting the establishment of long-term contracts for oil and petroleum products at much lower prices,” said a high-ranking U.S. official in a comment for FT.
The European Union will need to amend the sixth package of anti-russian sanctions, which details the embargo on russian oil. It was adopted in May after difficult negotiations. In particular, the ban on insurance services will require adjustments.
What are the risks of a price ceiling?
But the U.S. officials believe that a significant reduction in oil production will cause losses to russian production capacity, which is tantamount to the liquidation of the industry. When the Soviet Union collapsed, russia's oil production plummeted from 10 million to less than 6 million barrels per day.
More than 20 years passed before production resumed.
Another risk is related to transportation. The G7 countries control 90% of the global ocean-sea freight insurance market, and russia exports almost 8 million barrels of oil and petroleum products per day, which requires a huge number of ships. russian supplies may drop if there are not enough tankers on the market willing to operate without Western insurance.
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