You can leave your cap on: How the G7’s embargo backfired, and Russia's oil revenues almost doubled
The G7 decision to impose a $60-per-barrel price cap on Russian oil aimed to curb Moscow’s revenue from natural resource exports. However, a closer look reveals unintended consequences that not only fail to hurt Russia but also provide new opportunities for global players. The Western assumption of its near-monopoly on maritime insurance being a means to enforce the price cap has proven flawed. Instead of crippling Russia’s financial standing, Moscow’s net oil revenues almost doubled.
Despite the G7’s efforts, Russia’s oil exports continue to thrive. Seaborne exports rose by 10% last month, reaching 3.37 million barrels a day, well above the pre-2022 average of 3.1 million. This, coupled with higher prices, challenges the effectiveness of the imposed cap. Moscow experienced a nearly twofold increase in revenue from crude sales between April and October. In October, Russia’s net oil revenues reached $11.3 billion, constituting 31% of the country’s total net budget revenue for the month, according to information from the Russian Finance Ministry.
The G7’s choice to set a minimum price at $60 a barrel has definitely backfired. Instead of hurting Russia, it establishes an artificial supporting floor for oil prices, making it challenging for prices to reach a true bottom during a demand crisis. By taking 4.5 million barrels a day out of the supply picture with a minimum price, the G7 is inadvertently supporting OPEC’s inclination to cut supply, potentially driving prices even higher.
By imposing caps on Russian oil prices, the G7 is unintentionally fostering a commodity super-cycle, increasing dependence on OPEC and Russia rather than decreasing it. The supposed weapon against Russia’s finances is being transformed into a tool strengthening the ties between developed economies and China and Russia.
The G7’s price cap allows non-EU countries such as China to continue importing Russian crude at a significant discount. While the cap aims to restrict shipping, insurance, and re-insurance companies from handling Russian crude, it inadvertently becomes a subsidy for China. Russia’s state-owned oil giant, Rosneft, remains highly profitable, reaping a 16% return on average capital employed (ROACE) and more than 8.8 billion rubles ($96 million) in revenues. China emerges as a clear winner, securing a long-term supply of Russian oil at an attractive price while selling refined products globally at higher margins. The G7’s failure to encourage investment in alternative and competitive sources exacerbates the energy sector’s existing underinvestment, reaching alarming levels of $600 billion per annum.
Japan, as one of Washington’s closest allies in Asia, has strategically secured permission to purchase oil above the cap, challenging the effectiveness of the imposed sanctions. Despite rhetoric affirming support for Ukraine and the imposition of strict sanctions on Russia, Japan’s actions underscore its reliance on Russia for energy needs. While some governments may adhere to the sanctions to signal virtue and please the US State Department, Japan’s move highlights the fragility of the anti-Russia alliance and the potential for further defections if oil prices continue to rise. The unity forged through the global $60-a-barrel cap now faces a serious test as nations navigate the complex intersection of energy needs, geopolitical interests, and economic stability.
Efforts to enforce the price cap face challenges in an already volatile market. Sanctions and restrictions on Russia have not curtailed its massive revenues from natural resource exports, and a shadow fleet of aging tankers enables Russia to circumvent the limitations effectively.
In response to calls for increased transparency from OPEC+, Russia has committed to providing more detailed data on its oil production, inventories, and fuel output: Moscow already offers more information to assess its compliance with the OPEC+ cuts. Russia’s Deputy Prime Minister Aleksandr Novak announced that the OPEC+ alliance is prepared to implement additional measures and deepen oil production cuts in the first quarter of 2024 to prevent market volatility and speculation. Novak emphasized that the timely actions of OPEC+, resulting in withholding about 2.2 million barrels per day from the market during the first quarter of next year, will facilitate a smooth transition through a period of low demand. He stated that if the current measures prove insufficient, OPEC+ countries are ready to take further actions to address speculation and volatility in the market. Despite the announcements, market sentiment remains uncertain, prompting discussions on potential extensions beyond March 2024 if deemed necessary.
In conclusion, the G7’s attempt to cap oil prices as a means to weaken Russia has inadvertently become a subsidy for China, deepening global dependence on both Russia and China for energy resources. This strategic misstep lays bare the miscalculations of policymakers in Washington and the EU. The assumption that they could swiftly sever ties with Russia, likened to switching off a life-support system in an intensive care unit, signifies a fundamental misinterpretation of geopolitical dynamics. The anticipation that the international community would seamlessly transition to electric vehicles and solar energy, eliminating the dependence on Russian oil, highlights the inexperience and impracticality of politicians divorced from reality. The enforcement of an oil cap, in this context, epitomizes a greenwashed idealism that falls short of understanding the intricacies of the energy landscape.
As I settled into my favorite corner of the bustling morning café, immersed in the inviting aroma of freshly brewed coffee and the hushed rustle of newspapers, I unexpectedly found myself lost in a reflective moment. The rhythmic strains of Joe Cocker’s ‘You Can Leave Your Hat On’ played softly in the background, conjuring memories of the iconic roles played by Mickey Rourke and Kim Basinger in the 1986 film ‘9½ Weeks’. The melody accompanied a particularly unforgettable striptease scene, prompting me to contemplate a different kind of unveiling.
Amidst the dense columns of financial jargon and market analyses, a realization struck me: much like Joe Cocker’s assertion that “they don’t know what love is,” those in Washington might not truly grasp the essence of trade.
In this intricate world of economic complexities, there’s a profound simplicity, a sentiment encapsulated in those lyrics. So, allow me to convey this insight – in the realm of commerce, akin to matters of the heart, you can indeed leave your cap on.
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