The West wants to go further on Russian oil. Inflation makes it hard

Russia makes the same amount of money energy exports, as they were before his invasion at the end of February. Meanwhile, inflation is rising around the world, increasing political pressure on leaders such as US President Joe Biden, British Prime Minister Boris Johnson and French President Emmanuel Macron.

As the leaders of the major economies gather in Germany on Sunday for G7 meeting, they will try to come to a consensus on what to do next. Unfortunately, there are few good options in oil.
Several measures are being discussed, ranging from capping the price of energy imports from Russia, centralized purchasing by the European Union, a ban on ship insurance, and targeting countries that continue to buy from Moscow. Everyone has flaws, and some can raise prices even higher – risking popular support for the West’s determination to punish Putin.

“There are tools to be tougher after Russia, but they come with significant costs directly to consumers in the US and Europe,” said Robert Johnston, senior fellow at the Columbia Center for Global Energy Policy.

Imposing sanctions on countries that continue to dig up large volumes of Russian oil, including China as well as India, will hurt global markets, which are already under serious strain. And while Treasury Secretary Janet Yellen recently said the United States wants to discuss capping the price of Russian oil, such a complex mechanism may not be the solution the West is looking for.

“It distorts the market at a time when the market should certainly function well and there are too many workarounds,” Johnston said.

Russia continues to earn

The US, UK and Canada announced a ban on the import of Russian oil. More importantly, Europe will follow suit with Russian oil, which it imports by sea, a huge step given its long-standing dependence on Russian energy supplies. The block says that by the end of the year the ban will cover 90% of Russian oil imports.

European customers have already retreated. Russian oil exports to Europe fell to 3.3 million bpd in May, down 170,000 bpd from the previous month, according to the International Energy Agency.

But rising exports to Asia helped offset much of that loss. China, taking advantage of huge price discounts, saw its imports hit 2 million barrels a day for the first time. India’s imports also rose sharply, reaching around 900,000 barrels a day in May.

“We are actively engaged in reorienting our trade flows and foreign economic contacts towards reliable international partners, primarily the BRICS countries,” Putin said. said Wednesdayreferring to the emerging economies bloc, which also includes Brazil, India, China and South Africa.

Russia sells barrels of its Urals oil for about $35 less than Brent. a global benchmark that last traded around $113 a barrel. But since prices have skyrocketed this year due to the effects of the pandemic and the war, they are still making a ton of money.

According to the IEA, Russian oil export revenues increased by $1.7 billion in May to about $20 billion. This is well above the 2021 average of roughly $15 billion.

“The Russians are still getting a pretty good price,” Johnston said.

Senior US administration officials have said that this dynamic will not be easy to manage. priority at the G7 meeting. Speaking to reporters on Wednesday, they outlined their goal: to inflict maximum pain on the Putin regime and minimize side effects on the rest of the world.

“We expect them to ask how we can take steps that will further reduce Russia’s energy revenues?” one official said. “And how do we do that to stabilize global energy markets and reduce the disruptions and pressures we are seeing?”

What tools are left?

To make it more difficult for China, India and other countries to import Russian oil, Europe intends to ban on insurance of ships carrying Russian oil. If the UK joins, it is expected to deal a blow to the global fuel transportation system, given the dominance of the insurance market by Lloyd’s of London. The Biden administration is nervous that this measure will lead to a sharp increase in prices.

However, May Rozner, a campaigner for non-profit organization Global Witness, believes that Western countries need to go even further to quickly remove Russian oil from the market, since any delay gives market participants time to come up with creative ways to get around the rules.

“These scattered sanctions leave loopholes for the fossil fuel industry to exploit,” Rosner said.

The United States, with European support, could impose so-called secondary sanctions on third countries that continue to do business with Russia, as they did with Iran and Venezuela. The US government has not ruled it out.

But such a move would cause so much upheaval that experts say it’s unlikely, especially as rising political leaders in the West face the fastest rise in prices in decades.

If China and India had to find new barrels, the price of oil could easily top $200 a barrel, according to Darway Kung, commodity portfolio manager at DWS.

“It is hard to imagine a world in which the United States [such] sanctions on Iran, Venezuela and Russia at the same time,” Johnston said. “Oil has to come from somewhere.”

A customer refuels his van at a Shell filling station in London on Monday 13 June 2022.

Biden has increasingly stressed that fighting 40 years of inflation is a top priority ahead of the midterm elections in November.

Macron, who recently lost the legislative backing he enjoyed during his first term, has vowed to tackle the growing cost-of-living crisis, while Britain’s Johnson, who suffered two major defeats in last week’s by-elections, has appointed “Czar of the cost-of-living business » will work with the private sector on possible solutions.

Limiting the price of Russian oil is one of the solutions that has been abandoned. This would mean that Russia is not completely cut off from the market, but will be forced to sell oil at such a low price that it will not be able to make a profit.

The price cap “would lower the price of Russian oil and lower Putin’s income while allowing more oil to enter the world market,” Treasury Secretary Yellen said last week.

Countries such as Germany have stated that they open for consideration. But it’s not clear how the West can impose such a policy, or how to get countries like China and India to sign it.

“I think the more complex the system, the more problems it has,” Kung said. “[The] the market system works because, in a sense, it is very simple. It’s very efficient.”

Governments in the West could also try to loosen restrictions, either by increasing supply or by allowing prices to rise so high that demand begins to fall. None of them is simple calculus.

Some countries in the Organization of the Petroleum Exporting Countries, or OPEC, are in a position to ramp up production, and Biden plans to visit Saudi Arabia to cement ties next month. But most of the possibilities of the cartel have already been exhausted.

In the event of a global recession, driven in part by high fuel prices, demand for energy would fall and prices could start to fall on their own. But it would be very painful, including job losses and economic damage, especially for low-income families.

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