A rise in price benefits the producer, not the consumer
For the past few days, I have been viewing some of the sanctions taken against Russia with scepticism. Many seem to hurt Russia in the short-term but weaken us in the long-term. Not so with the recent oil and gas embargoes announced against Russia by the United States and the United Kingdom. These policies seem designed to strengthen the Russian economy and weaken our own in both the short-term and the long-term.
Oil and gas are what economists call ‘fungible goods’. Global markets consume these types of goods without discrimination as to where they come from. The only thing that matters is the price of a fungible good. If we ban Russian oil and gas, it will be bought by another country — perhaps at a very slightly lower price relative to oil and gas from other countries.
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What the oil and gas embargoes do is make global markets more skittish by driving up prices. We are already seeing oil and gas prices rise, partly due to the inflation generated by the Covid-19 lockdown policies and partly due to the conflict in Eastern Europe. The embargoes are adding fuel to the fire.
Here’s the thing though: higher oil and gas prices benefit oil and gas producers at the cost of consumers. Russia is, as everyone knows, an oil and gas producer. In the West, we are consumers. Driving up oil and gas prices, as seems to be official policy right now, benefits Russia and harms us. Why are our politicians doing this?
For Western consumers, our energy bills are going to rise. We have already seen this happen. But expect it to get worse — potentially a lot worse. The buzz in the markets is that oil price could rise from their present price of $127 a barrel to anywhere between $150 and $180. These price rises will then pass through to the price of everything else from food to clothing to international travel. You get poorer.
The politicians tell you that you take this hit to make the Russians suffer. But that is simply not true. In fact, they get richer by selling this more expensive oil and gas on the global energy markets.
I ran some estimates of what this would look like. The findings were remarkable. If oil prices rise to between $150 and $180 a barrel, the Russian trade balance will increase to 20-25% of GDP. In practice, this means that every year, for every four roubles in the Russian economy, Russia will be accumulating debts from the rest of the world of one rouble. Russia will be building a massive portfolio of international debt and thus vastly strengthening their economic and diplomatic power.
You pay for this. As prices rise, the money comes out of your pocket and more of it goes into the global energy markets. These sanctions are an incredibly self-destructive policies, and we must stop our politicians from pursuing them.