by Philip Pilkington
Tuesday, 6
December 2022
Chart
07:45

The Russian oil price cap won’t work

Europe will inflict more damage on its own economy than Russia's
by Philip Pilkington
Credit: Getty

Over the weekend, amid a major energy crisis which is decimating European industry, Western countries announced a price cap that they intend to impose on Russian oil. The idea is that these countries will get together and refuse to pay any more than their stated price for Russian oil – in this case $60 per barrel. The cap will be imposed by making it illegal for Western insurance companies to insure tankers of Russian oil that sell that oil for more than $60.

Russia has, unsurprisingly, not reacted well. It has stated in no uncertain terms that it will not sell oil to customers who demand to pay below the market price. Countries outside of the Western sphere have not even responded to the price cap announcement. They may need to work out alternative insurance arrangements, but this will only further undermine Western financial soft power in the global maritime industry.


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So, what will the price cap look like in action? To understand this, we should look at the long-term price trends of Russian oil. In the chart below we see the price for Russian oil since 2010 together with the average price between 2010-22 and the $60 price cap that our leaders have set.

The first thing that stands out is that the price cap we have set is far below the $75 average price for Russian oil in this period. So, we are demanding to pay $15 less than the average price for Russian oil. The second point to note is that prices for Russian oil have only been below the price cap level twice in recent history.

The first time was after the sharp decline in the price of oil that took place in 2014-15. This was caused by two dynamics coming into play at once. Firstly, the US massively increased its output of shale oil and, secondly, the Saudis increased production into a market awash with this new shale oil. With the Saudis backing the Russian position at OPEC+ meetings and US shale oil already baked into the market price, neither of these dynamics is likely in the future. The second time the Russian oil price fell below $60 was during the lockdown.

Throughout the whole period, Russian oil has only fallen below $60 around 31% of the time. The remaining 69% of the time, the price has been above $60. Based on these probabilities, it seems that in the coming months the market price will typically be above $60. When this happens, we will demand to pay less than the market price and Russia will refuse to sell us oil.

In the best-case scenario this will mean we will have to source our oil from elsewhere, likely at a substantially higher price. In the worst-case scenario, we will suffer from serious oil shortages as we find ourselves unable to make up for the Russian supplies that we have lost. This means a lot more inflationary pressure and a lot more potential for shortages. Most of our supply chains, for example, rely on diesel fuel to function. In the case of oil shortages, expect these to translate into shortages of basic goods in your local shop.

History will surely look back on the great European energy crisis of 2022-23 as one of the strangest historical phenomena on record. The Europeans have voluntarily destroyed their economies to impose sanctions on Russia that are having no real impact on their target. As the winter cold sets in, we would be well-advised to change course.

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Jim Jam
Jim Jam
1 month ago

History will surely look back on the great European energy crisis of 2022-23 as one of the strangest historical phenomena on record. The Europeans have voluntarily destroyed their economies to impose sanctions on Russia that are having no real impact on their target.

The apalling debacle started well before 2022. It was years in the making: diligently engineering a continent-wide calamity whereby reliable energy could only possibly be obtained from a hostile state. And most astoundingly of all, a state that was for years identified by our leaders and servial media as willing to go to extraordinary lengths to inflict damage upon us by whatever means neccasary. To add another layer of lunacy on top of all this: it was Donald Trump – the supposed Putin stooge – who alone had the sense to point out that we had all this coming unless we changed course. The giggles of the german elites and almost all of the media at the time now ringing hollow as millions face destitution and early death.

Appeals to reason at this point seem to be completely futile. The worse the situation gets, the more determined our overlords are to double down on the very strategies that caused it. Astronomical fuel prices have for the narrative setters been leaped on as an excellent opportunity to push for more windmills and solar panels; using the wildly inflated price of non renewables (that these same people had a significant hand in causing) to paint these known to be unreliable sources as the cheapest and thus (of course?) best option. Its virtually impossible to come by an honest assessment of the situation, even more hopless to find a single leader willing to admit the slightest error. The only fault that they do concede is to have not gone harder on a drive for all free landspace to be plastered with solar panels and windfarms – ignoring the fact that even if this were the case energy demands couldn’t possibly be met.

When I first read about the atrocities and hundreds of millions dead from communism, I perhaps naively assumed that these events were confined to the dark past or faraway places. I also wondered just how it was possible for a tiny clique of individuals to set whole nations of people down a such a calamitous path; how as the errors mounted and people started dying en masse, by what mechanism could the same course be maintained.

As the media machine rolls on, telling us what to think and how to think, as the terror of ‘climate apocalypse’ reaches fever pitch, as our education system morphs more and more into a sprawling re-education camp, as censorship is expanded under the guise of ‘harm reduction’ or ‘misinformation elimination’, the answer to these questions become clearer by the day.

Last edited 1 month ago by Jim Jam
Su Mac
Su Mac
1 month ago
Reply to  Jim Jam

Yes, for readers of history the parallels in Mao or Soviet double-think and the mind control being exercised over the Western populations is quite extraordinary, but also business as usual for humans! To be able to see through it and see society eating itself alive is one of the most frightening things I have experienced.

The confusion and fear experienced by mass delusioned and gas-lighted, climate + covid + Russia populations will draw us into a state of tyrannical technocratic control. This thoughtful article via Zerohedge captures it brilliantly.

https://www.zerohedge.com/geopolitical/quinn-we-are-trapped-truman-show-directed-psychopaths

Jim Jam
Jim Jam
1 month ago
Reply to  Su Mac

Cheers for that

Jim Veenbaas
Jim Veenbaas
1 month ago
Reply to  Jim Jam

Great post. The political agenda in the west has been hijacked by a small cabal of ideologues who lack any rudimentary common sense.

You would think the energy crisis would convince them to rethink this march to zero emission insanity, yet they double down. We need to embrace renewables so we won’t be dependent on Russia for fossil fuels, totally ignoring the fact that China controls 80% of the solar industry, more than 50% of wind and virtually complete control of batteries.

How we got here is baffling. Many people in the west are disconnected from the means of production. The laptop class can sit in their bubble and advocate for self-destructive policies because they don’t think it affects them – and maybe if doesn’t. The same people who could work from home during lockdowns, oblivious to the reality of its economic impact, are the ones who advocate for zero emissions.

But is this the majority? Their political power seems to far exceed their numbers. Maybe I’m wrong.

Jim Veenbaas
Jim Veenbaas
1 month ago

This underscores the madness gripping the political elite in the west. Do they simply not get it? Or do they simply not care about the hardship this will cause? The Russians would probably prefer to sell their oil to India for $60 – or even less – so they can resell it to Europe for $100.

I guess we could always increase production in Canada and the US. Don’t laugh. It could really happen – if Biden and Trudeau catch some Covid variant that actually reverses the brain fog they have suffered their entire lives.

Emmanuel MARTIN
Emmanuel MARTIN
1 month ago

I expect parts of the shippings insurance business to move from London to Dubai or Singapore. And this will be a one way trip.

Brendan O'Leary
Brendan O'Leary
1 month ago

Old oilfield saying: “the best cure for high oil prices is high oil prices”
In other words sustained high oil prices stimulate exploration and development which brings more oil online which brings down the price.
And there is always more oil.
Two problems this time:
Governments are shutting down oil and gas development with increasing recklessness.
The bigger problem is gas which is largely presold with only a small proportion available on the open market.

daniele vecchi
daniele vecchi
1 month ago

It seems to me that Europeans have difficulties in dealing with the fact that if you cut off a big chunk of supply via sanctions, and demand doesn’t offset, you create an imbalance that must be cured either by higher prices or by someone smuggling oil. additionally, history is teaching us that sanctions have never worked and they are also a questionable way of achieving certain objectives (the rationale is to create so much pain in a country that the population will revolt against the ruler. it didn’t work in Cuba, Iran, Venezuela, etc…). Something also very dangerous is the idea of buying only from countries that fit with certain criteria. As far as O&G are concerned there are basically few democratic countries that are also producers and exporters. Better have a diversified portfolio of suppliers and complement fossils with nuclear. Alternatives are completely useless and unreliable.

Paul Walsh
Paul Walsh
1 month ago

I have to say, I am scratching my head at this. If Russia didn’t have enough other options I guess we could impose it, but not sure that is the case. If there was a surplus I would have thought the price would go down anyway. Be interesting to see a justification of how it could work.

Jonas Moze
Jonas Moze
1 month ago

This destruction of the Western Middle and Working Classes is 100% intentional.

The Davos group – they represent the Vast Majority of financial and corporate leadership – have decided on a Corporatist Global Government, and they will have it. To do this they have to break the self sufficient, basically moral, Patriotic, and hard working, voting, successful Democracy Citizens. Such kinds as will vote for what is best for their countries, the Middle and Working Class, have to be destroyed to be made inconsequential.

The WEF will then make them into a Nu-Feudal State run by Global Government.

Covid was the tool to begin this financial war on the free peoples – then this insane WWIII on top – this is to break the wealth and security, to make poverty, and insecurity (destroy savings, pensions house prices, investments, with inflation and recession, and later depression) – to ultimately make the majority dependent on the state so they become ‘Clients’ rather than ‘Citizens’

This is intentional – it is to destroy you. None of this is about Ukrainian Freedom, just as the Covid Response was not about a flu – it is to break the global economy, and especially the Western one.

Warren Trees
Warren Trees
1 month ago
Reply to  Jonas Moze

Good Lord, I pray this is not so, but I fear it may be. Hard to imagine so many people are in on the scam from around the globe.

Rod McLaughlin
Rod McLaughlin
1 month ago

Brilliant. Thank you. There is good news hidden in the bad news. If sanctions don’t weaken Russia, but weaken Western European countries, this will weaken NATO, the subordination of the West to the criminals in the Pentagon, the greatest threat to life on earth since the extinction of the dinosaurs.

tom reed
tom reed
1 month ago

People, often those with the strongest views, misunderstand the goal of the price cap, which is
1) to create, effectively, a loophole in the EU’s 6th package of sanctions and
2) — secondly — to create a drag on the price of crude oil and reduce Russian state revenue.

The goal of the price cap is — as the US has said repeatedly — to allow countries to continue buying Russian crude.

Western soft power, in terms of its global relevance to oil marketing and shipping, will diminish as buyers in India or China shift to local currencies and local insurers.

But the west’s role would suffer far more, it seems logical to argue, were there *no* price cap.

Iris C
Iris C
1 month ago

Politicians, journalists and probably you and me are well enough off to pay the inflated oil prices, the increase in groceries, etc., but what about those who are on minimum incomes and have no voice in the corridors of power. State employees can blackmail the government into paying more than it can afford but small and medium businesses – the backbone of our economy – must make ends meet. .
It is time that there was a poll covering only those in C(2). D and E classification categories to get a better understanding of what they think about the war in Ukraine continuing with no end in sight.
I believe they would want the UN to broker a peace settlement as soon as possible. Freezing oil prices is a limp response…..

Last edited 1 month ago by Iris C