Putin is preparing a response. Is the $60 Russian oil price cap a win or a loss?

11 December 2022, 02:07 PM

The enactment of a price limit of $60 per barrel for the purchase of Russian oil is part of the G7, EU, and US war on Russia's surplus oil profits

Now the question has arisen: does setting the price cap at $60 represent a win or a loss in the energy battle? Unfortunately, the energy game is much more complicated than that. It is played on many levels, and a single decision cannot determine the winner. This move is part of the G7, EU and U.S. war against Russia's surplus oil profits. If you look carefully at some of the figures and facts, you can say with restrained optimism that Russia will lose this war as well.

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First, after the introduction of the price cap, there was no sharp jump in prices on the market, which the Russians were counting on. Instead, the market reacted very calmly, with prices even decreasing slightly. The market price of oil is the main indicator to monitor. Price ceiling or not, it’s what Russian profits depend on.

Secondly, Russia has fewer and fewer friends. Turkey has actually supported the introduction of the price ceiling, because it requires documents to be provided by tankers trying to pass through the Bosphorus. China and India did not support the idea, but they are happy to take advantage of the discounts that they get from the Russians.

Thirdly, Russia is forced to behave like a pariah country, smuggling oil with the sort of schemes used by Iran and Venezuela. The Financial Times published a photo in an investigation they published on how a Russian tanker can hide so that no one will guess what it is carrying. The price on this contraband product is even lower, so all Russia’s attempts to buy tanker hulks to transport its oil and circumvent sanctions have thus failed. Their oil is cheap, which was the whole goal all along.

Most importantly, Russia's oil and gas revenues are already falling, collapsing by 49% in November according to some estimates. The Russian Federation is already losing production. They are shuttering production capacity. This affects not only the oil drilling industry, but also the rest of the spheres that serve oil production and the small towns where the people who work on oil rigs live.

The impact of the oil embargo and price ceiling will not be immediate, but it will be very significant, at both the national and local levels in Russia. I would even say that its effects will first be felt more at the local level, and then at the level of the general consolidated budget. We will see it sometime in the next two months. It will be reflected in Russia’s budget deficit and in the reduction of their expenditures related to the social sphere. Their impoverishment will continue.

At the same time, I am sure that we will see the development of the Russian game in the market of oil and oil products. And in this next stage of their game, they will try to do everything they can to cause an economic crisis through the supply of diesel and petroleum products to the European market, since subsequent rounds of sanctions will be aimed specifically for this group of products. It will not be easy for either the EU or the U.S. to get through these next three months, as the market will need to be completely reformatted. It will be much more difficult to do this with diesel and petroleum products than with oil itself. We can already see that even Germany has opted to nationalize production capacity that was in Russian hands in order to ease the situation and protect itself from market manipulation. This next phase with the implementation of sanctions on oil products will be particularly difficult.

The EU market is opening for India and the rest of the countries which are becoming players in the oil products market instead of Russia. But there will definitely be a period of difficulties and nervous waves. There will be market speculation, and we will again hear from the Hungarians, from the Italians, and from the rest of the disaffected, who will try to shake up the situation, for they are still being used by the Russians as agents of influence on the EU.

How will these processes affect the Ukrainian oil products market? We are definitely part of the global market, and when there is an increase in global prices for oil and oil products, we also feel it ourselves. Of course, everyone will feel the increase in prices for oil products in the EU in their wallets, and here we are not immune from price spikes. The Europeans expect that diesel prices may rise slightly, but ultimately not significantly. Of course, the winter period will be more difficult for us Ukrainians than for anyone in Europe, regardless of the fact that Europeans are also preparing to turn off the lights themselves. However, this cannot be compared to the risks we have and the way our energy system is constantly under attack from Moscow. Thus, fuel prices are not the hardest thing we have to face, and at the end of the day, we will have fuel.

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