by Tom Luongo, Tom Luongo:
The EU and the US went forward with their long-debated, long-telegraphed move to put a price cap on Russian oil at $60 per barrel.
By believing they can pressure suppliers into not hauling Russian oil lest they run afoul of the sanctions that support the price cap, they believe they can take only Russian oil off the market for the long run.
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Because of the way oil is actually traded in the real world, versus the way it trades in Janet Yellen’s head, this policy is actually much harder to implement than it actually looks. You don’t buy oil at the crude oil counter at Target or Wal-Mart.
There isn’t a price tag you can look at and say yes or no too. As Tsvetana Paraskova at Oilprice points out, crude contracts are written based on a discount or premium to a benchmark price at a particular moment in time.
“Physical traders rarely trade on a fixed price,” John Driscoll, chief strategist at JTD Energy Services Pte Ltd, told Bloomberg.
“It’s a much more complex space where they trade on formulas and spot differentials to a benchmark crude for the trading of actual cargoes as well as for hedging that follows,” said Driscoll, who has more than 30 years of trading oil in Singapore.
To complicate things further, the EU wants to remain flexible to change the cap at its discretion.
“The price cap is not set in stone – it “is fixed for now but adjustable over time,” the EU said last week.
If this sounds like a recipe for complete disaster, it is.
No matter what happens here, the quantity of oil to be produced under this cap, even if it isn’t successful, will go down. Period. See chart below. If you disagree with this then you might just qualify to replace Yellen as Treasury Secretary of the US.
That said, Janet Yellen may be stupid, but she’s not that stupid. She knows what this price cap she’s championed will do. So, as always, with these people the question you shouldn’t be asking isn’t, “Will this work?” or “How will Russia respond?” but rather, “Is this the point of the exercise?”
I was contacted by Sputnik News for my comments on this (article here) and this is the tact I took in answering their questions.
If everyone involved knows that price floors and price ceilings always and without fail create production shortages, then why did they do this when the world clearly need more oil?
Because this is a feature of the policy, not a bug.
By doing this, like every other intervention into oil delivery since the start of the war in Ukraine, the goal was to take Russia’s supply offline and hope that other producers would see the opportunity to take market share from the evil Russians while simultaneously trying to push capital investment into competing energy technologies — like nuclear, hydrogen and unicorn farts.
It hasn’t worked. Russia happily sells their oil at a major discount to Brent Crude, but will it remain the $30 China and India have been paying below Brent? Only if Brent stays at $90+ per barrel. With Brent now trading in the high $70’s those discounts will attenuate.
And with Vanguard following Blackrock’s lead in ditching ESG as a policy driver for investment flows, we’ve likely reached the limit of this stupidity, because despite the protestations of commies the world over, capital flows to where it is treated best.
That flow is now distinctly around Europe rather than the intended target, Russia.
There are many goals of this price cap, some stated, some implied, my comments are in italics afterwards.
- Limit Russia’s oil revenue enough to bleed out their budget. Not likely as the discount to Brent will rise and fall with futures. Russia’s cost of production is the lowest in the world with the highest spare capacity to bring online or take offline.
- Spur other OPEC+ members to pump beyond their quotas and break the cartel. Again, not likely, as the only ones who have spare capacity are also under heavy sanctions, Venezuela, Iran, etc. To crib from Planet of the Apes, “OPEC together strong.”
- Make the Saudis an offer they can’t refuse, to lead OPEC without Russia. This has fully failed as KSA has just signed a Strategic Partnership with China during Xi’s first visit to a foreign power since COVID faster than you can say, “multi-polar world.”
- Bring the price of oil down to allow “Biden” to refill the SPR at a big discount. Only so long as they can manipulate futures prices down and keep demand off the market.
- Cause further chaos in oil shipping to freeze investment capital in an industry trillions behind the curve in exploration because of ESG and “US/EU policy” This is what the real goal is. It’s why I think Liz Truss was taken out as UK Prime Minister and why Germany happily went along with the Nordstream bombing and closing off the Druzbha Pipeline.
- Force Putin to sell Europe oil below market prices to fund the upcoming war effort against Russia, now clearly on the table for 2023. They want you to believe oil flows to Europe have already cratered, while bookings (as Sputnik pointed out) for Sovcomflot’s tanker fleet are up. The only numbers that matter are Russia’s exports, not whether oil flows through western tracking data.
I’ve maintained for years that Europe feels they have some kind of monopsony (single buyer) power over Russian energy. And all they have to do is hold their nose and refuse to buy Russia’s products and this will force them to sell to them at whatever price they demand.
What I’m still trying to figure out, however, is how much better a deal do they want than the one they had pre-Ukraine War, a war they did nothing substantial to stop?
