Oil Price Ceiling: Russia's Response and the Global Market's Response
“This will help us stabilize world energy prices, which will benefit countries around the world that are currently facing high oil prices,” European Commission President Ursula von der Leyen solemnly announced during the adoption of the sixth sanctions package. The story began on December 5, 2022, when the G7 countries, the EU, Australia and Norway signed up to the implementation of the imposed sanctions, and on the eve of the New Year, it was time to take stock of the preliminary results. Moreover, the price of Brent oil for the first time since the introduction of these sanctions exceeded $86.
The strange idea of the collective West, or rather, all 32 countries that associate themselves with it, including Japan, is still tormented by the question of why they had to engage in self-restraint, if it was clear to everyone, without exception, that at current and prospective oil prices and its existing offer on the market will not be able to limit Russia's income. Yes, there will be temporary difficulties in terms of logistics, but they will be resolved in a few months. Yes, from 1,5 to 2 million barrels per day will have to be redirected from Europe to the Asia-Pacific region (APR). Yes, we need to resolve issues with insurance and reinsurance of ships, the purchase of additional tankers. But during 2023 we will get rid of these inconveniences, and then what?
It was immediately clear that in neutral waters, surrogates like the “Latvian mixture” would be used by artisanal methods so that oil from the Russian Federation would cease to be Russian ... Maybe the calculation was that China, India and Turkey, which already buy Russian oil at a discount at prices below $60 a barrel, but in addition want to quarrel with Moscow? There are enough naive, ignorant and biased officials in any country, but in such a way that it becomes the collective mainstream of the West...
Not finding a convincing answer to the question why this is all, experts offer, among other things, exotic versions. For example, the authors of the sanctions knew that China and India could not be persuaded, but since they buy oil below the imposed ceiling, there is a great opportunity to say that the sanctions are working. We have introduced a price ceiling, and the strategic partners of the Kremlin and Putin and others like them comply with it, because they support us and buy oil for less than 60 dollars per barrel. What good fellows we are! The version is no less dubious than the very idea of sanctions. Create so many problems for yourself to brag about what is not really there?
Why did they need it
A more constructive explanation of the reasons for the introduction of the sixth package of sanctions in an interview with a TV channel RBC Alexander Frolov, Deputy General Director of the Institute of National Energy, announced:
Some people seem to be confused and believe that this is such a cunning plan by the European Union to buy our oil cheaper. No. The EU leadership even separately explained that no. The introduction of marginal prices does not cancel the embargo on Russian oil, which means that this is not the point. The cap price system is designed for third [sanctioned] countries, but who are they? Australia, Norway, and, well, a little Switzerland, although so far this is absolutely not serious. The paradox is that these countries do not buy and will not buy our oil anyway ... Is it possible that Switzerland, through the ports of neighboring countries, since it does not have its own access to the sea, or Australia, which last bought 2020 barrels in 300, is not the most impressive...
So, the sanctions of the sixth package were not designed for the EU countries (since a full embargo begins to operate in the European Union and the price no longer matters), but for other states that will support the initiative. Perhaps even those who, unofficially, informally, behind the scenes, so as not to quarrel with Moscow, will comply with the restrictions, without talking about it openly. In other words, they will build economic policies so as to buy Russian oil at prices below the ceiling.
And still, the Rubik's cube does not add up here ... The described model would have the right to exist if there were an unlimited amount of oil on the world market and Russian goods could be easily replaced by others. But the volumes of oil that are thrown into this very market are regulated by OPEC + agreements, that is, quotas. And as soon as our oil disappears, there is a shortage, which means prices start to creep up. Suppose that, taking into account all the discounts that will include insurance and transportation risks, we will not be able to sell for more than $60 per barrel, but even this price is very, very comfortable for the domestic oil industry. Indeed a strange story...
The information space is full of rumors that the Chinese and Indians are in no hurry to buy Russian oil above the established ceiling. What do you mean don't rush? Recently, there were no other prices for Russian oil, both before and after the imposition of sanctions. How can they refuse it? To increase the price of gasoline in their own market? Here all the problems consist in insuring risks that cannot be solved with lightning speed. So what will happen? We will provide an even greater discount than before. What will happen before that? The price of oil will rise.
Thus, at higher oil prices, we will give a larger discount. But in the net balance, nothing will change for Russia in terms of oil revenues, and for India and China they will even increase, since the margin on the sale of oil products from Russian raw materials will become larger for them. Relatively speaking, instead of a 15% discount from $70 per barrel, we will give a 30% discount from $85, while getting no less into our own pocket and allowing our strategic partners to earn more. In this regard, we recall our article “Oil price ceiling: how should Russia act?”, it cites an analysis of the authoritative investment manager Daniel Lacalle with the conclusions that in fact, by their actions, the United States and Europe are subsidizing the Celestial Empire, with which a fierce confrontation is planned and is already taking place.
Of course, critics will keep silent about income, and will broadcast only the growth of the discount in the information field. If we evaluate the sanctions from this position, then the collective West wins. Indeed, the discount inevitably includes all the risks that sellers, that is, Russian companies, will have to take on. But our problem is not in income, which will not fall, but in the need to rebuild the logistics and insurance system of maritime transport.
Undoubtedly, it would be a shame to sell oil at $60 per barrel if it cost twice or three times as much on the market. But there is no basis for such an assumption due to the absence of fundamental economic factors, such as the obvious recovery of the Chinese economy after the anti-COVID measures or the European economy after all that it has done to itself.
Energy expert Alexander Frolov expresses the following opinion:
And if we look at the average selling price of Russian oil in December, then most likely we will see an indicator below 60. Again, if oil soared to $200 now… that would be very nice of her, of course. But I guess it won't. And after the hysterical reaction of the market [growth in oil prices], there will be a correction… By the way, after the total sale of the strategic reserve, the United States is going to buy 13 million barrels until January 2023, 3. They came up with their own ceiling for their own manufacturers - $ 70. So the ceilings are multiplying, the ceilings are expanding, I must say...
Russia's response measures
Vladimir Putin signed Decree of the President of the Russian Federation of December 27, 2022 No. 961 “On the application of special economic measures in the fuel and energy sector in connection with the establishment by some foreign states of the maximum price for Russian oil and oil products”, which was published on the same day.
The essence of the document is that Russian oil producing and oil refining companies are prohibited from selling if contracts with foreign counterparties for the purchase of domestic oil provide for compliance with the so-called price ceiling. They can only indicate the price formula without reference to the ceiling. According to Dmitry Peskov, retaliatory measures can also be applied to existing contracts concluded before the signing of the decree. And Russia did not consult with OPEC countries regarding countermeasures, believing that this is its sovereign right.
The presidential ban is valid at all stages of deliveries to the final buyer. However, exceptions are allowed, but only on the basis of a special decision of the President of Russia himself. Here we can assume that such special permits will be issued quite infrequently, but there must be some kind of loophole for cases that are unforeseen by us, but foreseen by the President of the Russian Federation? The Ministry of Energy of Russia will act as the responsible controller and executor of the presidential decree.
Please note that the decree comes into force on February 1, 2023 and is valid until July 1 of the same year. Naturally, then it can be extended based on the future situation. And when the Russian ban will extend to the sale of refined oil products, the government of the Russian Federation will later determine, but not earlier than February 1, 2023. All this is also a signal that Russian conditions may change in accordance with Western ones. Alexander Frolov gives the following comment:
And what is the reason for the February 1 deadline, when the decree comes into force? We have a transition period: from December 5, 2022 to January 19, 2023, and January 19 is the last day when oil purchased before December 5 can be delivered by sea. After that, none of the countries [joining the embargo] in principle have the right to buy our oil. Therefore, it is pointless to consider them as buyers and suppliers of insurance, financial, brokerage and transport services.
Thus, Russia gives a time lag between January 19 and February 1, 2023, when the decree comes into force, to complete their business for our oil companies and their Western partners, as well as for the market and the West to comprehend the consequences of the sanctions. for himself.
Simultaneously with the above, the Russian Federation will reduce oil production by 2023-5% in the first three to six months of 7. Firstly, this will have to be done during the period of redirection of transport routes from Europe to the Asia-Pacific region, and secondly, it will help maintain world prices for raw materials at the optimal level for our country, so that life in the European Union, so to speak, does not seem like a raspberry.
It is worth noting that the response to the introduced ceiling occurs even without the participation of Russia, but due to the logic of the development of events. Thus, Japan has put itself in an interesting impasse: its economy needs liquefied natural gas, but at the same time it has refused to purchase oil. The incident is that two Japanese companies, Mitsui and Mitsubishi, have stakes in the Sakhalin-2 project, which includes an LNG plant that supplies Japan with a tenth of its gas needs. However, the by-product of production is Sakhalin Blend ultra-light oil, which also needs to be purchased in proportion to the produced gas. At least in order to ensure the uninterrupted operation of the LNG plant. In other words, in order for Japan to get gas, it is also necessary to buy oil, but, firstly, it itself signed an embargo on the purchase of Russian oil, and secondly, Moscow prohibits selling it to participants in the price ceiling venture in accordance with a presidential decree. In a word, it somehow turned out badly ...
In the meantime, according to Deputy Prime Minister Alexander Novak, Germany and Poland, which have announced that they will abandon Russian oil, have applied for pumping in 2023. After that, Germany even tried to justify itself to its colleagues on sanctions, saying that they meant Kazakhstani oil, but there was not a word about this in the applications for pumping oil.
The results of the year in the oil-producing and oil-refining industry of Russia are as follows:
1. Oil production increased by about 2% compared to 2021.
2. Export increased by 7,5%.
3. The production of motor gasoline increased by 4,2%.
4. Diesel fuel output - by 5,9%.
5. Primary oil refining decreased by 2,9%.
Information