Authored by Tom Luongo via Gold, Goats, ‘n Guns blog,
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.
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.
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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.
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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.”
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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.”
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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.
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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.
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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?
To believe that the EU only pursued this antagonistic relationship with Russia because it is a colony of the US Empire is simply delusional at this point. At no point did Europe try to make peace with Russia financially, economically or diplomatically.
Former German Chancellor Angela Merkel reiterated recently in an interview with Die Zeit that the Minsk Accords were designed as a delaying tactic to arm Ukraine for the future war against Russia.
This admission blows up that entire coping narrative of ideological leftists who hate the US (and all that it supposedly still stands for, i.e. capitalism) so much they can’t accept the reality of their insanity.
Europe chose this path. They chose freely to freeze Russia’s foreign exchange reserves, decline to buy their oil and gas, and sanction Russia to the point of destabilizing not just their own food and energy security, but also everyone else’s in the process.
Davos hates the freedom that oil and gas represent. Their strategy is to starve the entire oil complex of needed capital and hope it collapses. What it’s doing is accelerating the creation of parallel markets for shipping, insurance, payment clearance and investment banking for base commodities in markets outside of their control.
They’ve interfered in elections/governments the world over in key pockets of resistance — the US, Brazil, now Peru, the UK, Pakistan, Kazakhstan, — to disrupt any further integration of Asia.
Most of these have failed, but have succeeded in making the world less safe, less predictable.
The price cap is a stupid policy implemented by people with a clear animus against humanity itself that they would drive the world to the brink of nuclear war. It’s nothing more than the same scorched earth policy that’s been on display for years now.
If we can’t rule the world, we will burn it down. All it’s really doing is accelerating the split between East and West. Russia is done with Europe. They have turned East and will wait for Europeans to come to their senses and find common ground. Both they and the Chinese realize now there is no return to normalcy without the West collapsing in a fit of rage.
All over a few miserable dollars per barrel.
As always, my full replies to Sputnik are below the line.
As the price cap on Russian oil comes into force, how will the global market react? What long-term consequences do you expect?
The price cap is simply moronic from a price perspective. Any 1st semester student of economics understands that price caps/floors create shortages. So, we shouldn’t look at price directly. Price is a consequence of supply and demand, in this case a deliberate attempt to create a shortage by introducing unnecessary friction all throughout the oil supply chain to create a global shortage of energy.
Oil prices will rise in the short term because of this and investment in new oil sources will now accelerate but outside of the West who have turned completely hostile to new sources of oil entering the market.
The price cap was conceived with the objective of punishing Russia over its special military operation in Ukraine – what are traps and pitfalls of energy supply politicization?
As always with moves like this, there is the story we’re told and then there is the real story. This cap will not deter Russia in any significant way from exporting oil. What will happen is the map of oil delivery worldwide will change. Energy that flowed west will now flow east and south. The ESPO pipeline will see full utilization as demand from SE Asia rises.
Projects that previous to the divorce between Russia and the EU were uneconomic are now economic as a price floor has now been put on the market. That’s what is so funny about this ‘price cap’ on Russian oil, it’s actually a ‘price floor,’ ensuring that Russia, the country with the lowest cost per barrel of any major producer, has guaranteed minimum income going forward.
I believe the goal of Janet Yellen, the person most responsible for this idiocy, is to both raise the price of oil to accelerate investment into renewables but limit the amount of money Russia gets, starving them, and other oil producers of capital.
In short, it’s nothing new. These are the same people who put sanctions on Russia to make the ruble weak while the price of oil rose.
How can the move backfire on G7 countries and the EU in particular?
It already has. As I said, this is just an extension of the same policy that’s always been in place. What will (and is) happening is that the investment they are trying to retard into replacement oil and gas reserves will now occur outside of the western financial system and western currencies, i.e. the US dollar and the euro.
Capital flows both to where it’s needed and where it’s treated best. What’s happening in the West is one big policy to freeze capital where it is currently trapped and beat it with the ESG stick. I could write a book here about why this is dumb and counterproductive, but I’ll just state that, in short, it won’t work.
This price cap is the beginning of the major shift towards the East becoming the center for global capital investment.
The price cap had sown discord within the EU and resulted in months of bickering – do you expect further split within the EU members now, as the measure came into force?
Yes. But the European Commission isn’t listening and is continuing to play hardball with every EU member state and Russia on every issue. At the same time, they also support NATO expansion, which is tantamount to an open war declaration against Russia. Now it’s War Crimes Tribunals against Russia for a war it won’t fight or can even win.
The internal politics of gas delivery within the EU is now facing a shift with Italy’s Giorgia Meloni clearly angling to replace Germany as the port of entry for most piped gas into Europe. France and Germany are hopping mad about this.
This energy crisis in the EU is designed to break the spirit of Europe’s people to accept full totalitarian/centralized control over everything. The outward face of the EU is one of inevitability, while masking the deep divisions that are tearing it apart at the seams.
What kind of problems will the EU face given that Russia’s Deputy Prime Minister Alexander Novak specified earlier that if the cap came into effect, Russia would either redirect its crude supply or slash production?
China and India are already filling the gaps. Russian oil will be blended in the Bahamas or other storage ports and then sent back to EU refineries. It’s all shadow play and theater. The main goal, as I said, was to make the oil markets less efficient, raising costs while starving it of capital at the same time.
The EU will face continued high energy prices, a net outflow of capital from lack of investment and a falling currency as their competitiveness on the global market collapses. Considering that they are also an unreliable trade partner who constantly changes the terms of contracts while they are still active, will see trade that used to be done with it go somewhere else.
All they are doing is ensuring no one will want to do business with them after 2030, hence their full-throated support of further war with Russia over Ukraine…. If the EU will suffer, then so will the whole world. It’s the ultimate game of brinksmanship. And they are the ones driving this bus, along with certain old money connected players in the US, while simultaneously using those players in the US, like Yellen, as a smokescreen for their preferred outcomes.
The clear story now is that the EU is blaming the US for all of its ills, exactly like I said they would do over a year ago. EU Commission President Ursula Von der Leyen just did this, complaining about the US subsidies for green energy projects. French President Emmanuel Macron complained that the US was making too much money off selling the EU natural gas.
Are they serious? Putin offered them a way out of this but, as always, the Eurocrats want their cake and eat it too… they want to punish Putin and get their energy at subsidized rates. Seriously, why does anyone take these apparatchiks seriously?
Everything they do is the equivalent of pointing a gun to their head, pulling the trigger but only grazing the skull and then blaming everyone else for letting them do it and telling the Americans to go kick Russia out of Ukraine.
It’s pathological.
What will be the market’s reaction in the event of Russia curbing its production?
Clearly oil prices will rise. China and India will still buy Russian oil, refine it and sell it back to the EU at value-added prices. The money Europe used to make refining cheap Russian oil will now go to China and India, who paid for it at a discount, using their own currencies or rubles, and Europeans get stuck with the bill.
So, in 2023, expect another major wave of inflation based on rising energy prices, China re-opening its economy putting upward pressure on metals prices and food shortages from the EU’s war on the periodic table of elements.
Tyler Durden
Sat, 12/10/2022 – 09:20
