June 1, 2022 - 11:05am

The past two weeks have been a wild ride in the energy markets. Policymakers appear to have started to contemplate the fact that their sanctions on Russia are poorly designed and potentially self-destructive. This has led them to consider alternatives.

It all started with an interview given by President of the European Commission Ursula von der Leyen to MSNBC last week. In the interview, von der Leyen laid out in impressive detail why energy sanctions against Russia were self-defeating. She explained that if the EU cut off their oil imports from Russia, then the prices of oil might rise, and Russia could sell the oil for more money in other markets.

At this point, it seemed that the European Commission economists caught on to the fact that both the quantity of goods sold and their price matter in energy markets. But earlier this week, the EU — and with them von der Leyen — appear to have reversed their stance once again. The EU announced that it would be undertaking a ‘partial embargo’ of Russian oil imports, and von der Leyen was soon tweeting her support.

It remains to be seen if this embargo is serious. If it is not, the EU has figured out a way to run the Russian oil via alternative channels — probably via Hungary, who has been given a carve-out. But if the Europeans cut off Russian oil supplies, the continent will face further inflation and a deepening cost-of-living crisis that no politician will be able to control.

The real threat to Russia comes not from the EU, but OPEC. OPEC came out this week and announced that they would consider pumping more oil into the markets. The nature of the announcement makes it look like a negotiated agreement between OPEC and NATO. OPEC argues that since Russia is not able to supply energy markets due to the embargoes, OPEC will have to step up to the plate.

This leaves open the possibility that OPEC could use the opportunity to flood the oil market and drive the price down. This would genuinely hurt the Russians economically, but it is not clear that OPEC have either the will or the means to crash the oil price.

First, OPEC has not made any explicit commitment in public — it could simply be a PR move to make Western counterparts happy. Second, while the world economy is running hot with high inflation, it is not clear that the cartel could bring the price down even with an extensive increase in their oil output. Third, Russia is not as reliant on high oil prices in the same way it was the last time the price collapsed in 2015.

At this late stage in the game — with inflation clocking in at over 8% in Europe — it is difficult taking any of these politicians seriously. They have made a mess of their ‘economic war’. Meanwhile, their ‘infowar’ is pushing them toward ever more self-destructive acts. It is not clear who this theatre is targeted at, because voters suffering from the inflation will punish them at the ballot box.

Perhaps the politicians have calculated the probabilities of an oil dump by OPEC better than I can; perhaps they have pulled off a master feat in diplomacy behind the scenes; and perhaps we will watch the Russian economy collapse under oil prices crashed by the cartel. But I wouldn’t put my money on it. More likely is that oil prices remain high due to misguided interventions by Western leaders, inflation continues to ruin our finances, and politicians continue playing the dice with our livelihoods. It is a bleak forecast, but a realistic one.

Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics