As the war in
Ukraine grinds on, Europe and the US continue to search for tools to do the impossible:
cut Russian President Vladimir Putin’s energy earnings without disrupting oil
and gas supplies or driving prices through the roof.
اضافة اعلان
The latest option is a cap on the price of purchased
Russian oil. But a better and more feasible plan languishes without sufficient
advocacy.
On May 31, the EU reached an agreement to ban most
Russian crude and refined petroleum imports by the end of 2022. Shipments by
sea — which account for
about two-thirds of Europe’s purchases from its eastern neighbor — will be forbidden.
Poland and Germany also agreed to end pipeline imports. If both measures are
implemented, the only Russian oil supplied to the EU will come via the southern
Druzhba pipeline, which fuels Slovakia, Czech Republic, and pro-Kremlin
Hungary.
Last year, 56 percent of Russian crude and 70
percent of its refined product exports went to Western countries — mostly
European nations like Germany, the Netherlands, and Poland. The US, Canada,
Britain, and Australia, meanwhile, which import little Russian oil, had already
announced measures to halt Russian oil imports.
With Western buyers closing their wallets, Russia
has reoriented sales to Asia, particularly India, which was not previously a
major customer, and to some extent China. To sweeten these deals, Russia offers
discounts of up to $30 per barrel, but prices have risen so much (they have
been over $100 a barrel since March) that Moscow is earning at least as much as
immediately before the war, and 50 percent more than in the first four months
of last year.
For now, Russia’s new markets seem secure. If the
West were to try to block these sales to Asia — for instance, via a shipping
ban — it would anger important allies like New Delhi, invite avoidance (as has
occurred for several years with sanctions on Iran and Venezuela), and, to the
extent it was successful, drive world oil prices even higher than they already
are. This could trigger a global recession, imperil the electoral fortunes of
US President Joe Biden and several European leaders, and create political
pressure to concede to Russia.
Aware of these constraints, Western allies,
including Japan, have sought more nuanced instruments. At the G7 summit in
Germany last month, leaders agreed to consider a cap on Russian oil imports
sold above a certain price. This could be enforced by banning shipping or
insurance for cargoes purchased above the limit. Figures discussed for the cap
are in the range of $40 to $60 per barrel.
But there are numerous problems with this approach.
First, it would require the EU to revisit its own ban passed in May,
laboriously crafted after long debate with Budapest. Second, the proposed price
is too high — well above the likely production cost for Russian companies of
$20 per barrel. The Russian state heavily taxes its companies at prices above
$25 per barrel. Price caps on refined products would have to be set, too,
inviting creative re-labelling.
The best of these is a stiff per-volume tariff on imports of Russian petroleum. This would weaken the incentive for buyers to cheat as they would still face the end-user market price.
Third, insurers from China and India would likely
step in. While Asian insurance providers do not have the reputation or coverage
levels as European firms, they would still be adequate for sales to those
destinations. Fourth, as with the “Oil-for-Food” program in Iraq in the 1990s,
the cap would invite under-the-table deals and kickbacks. Barring that, Russia
would simply play divide-and-rule by selling above the cap to its geopolitical
supporters.
Finally, Russia may still cut back on oil shipments
— as it has already done with gas to Europe and by invoking spurious technical
reasons to limit Kazakh oil exports via its territory. Former President Dmitry
Medvedev even threatened Japan that its adherence to a cap would see its access
to Russian oil cut off, and prices going above $300–$400 per barrel.
More effective solutions have been advanced by
Ricardo Hausmann, a Harvard economist and former minister of planning of
Venezuela, Harvard Russian scholar Craig Kennedy, and US Treasury Secretary
Janet Yellen, among others.
The best of these is a stiff per-volume tariff on
imports of Russian petroleum. This would weaken the incentive for buyers to
cheat as they would still face the end-user market price. China, India, and
other countries could be brought in by a combination of the stick of shipping
sanctions, and the carrot of retaining much of Russian oil earnings themselves.
This would create a kind of buyer cartel. But such concepts have achieved oddly
little traction despite their economic merits.
Whatever mechanism is arrived at, the impact on
rival oil producers will be profound. Currently, Moscow cooperates with OPEC
and other leading producers in the OPEC+ alliance. Saudi Arabia is keen to
retain Russia within this framework, even though it cannot currently live up to
its production targets.
An outright Western ban on Russian oil would drive
up prices, thus benefiting Russia’s petroleum rivals. It would also lead to
intense struggles for market share in the Middle East’s traditional Asian
markets, even though Middle East producers would reorient to sell more to
Europe. India, China and others would have tough choices on whether to buy as
much as half their oil from Russia at attractive discounts but with major
logistical and legal problems, and at the penalty of dropping their
long-standing and reliable Gulf suppliers.
A price cap or
tariff would be less disruptive — as long as Russia did not retaliate — but
would still invite trading shenanigans. Russian oil output is also likely to
decline in the longer term, weakening Moscow’s hand as a competitor to Gulf
producers, and suggesting Gulf countries should step up expansion of their own capacity.
As Western efforts to square the stubborn circle of oil prices continue, Middle
East oil exporters will watch keenly from the sidelines.
Robin Mills is CEO of Qamar Energy and author of “The Myth of the Oil Crisis”. Syndication Bureau.
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