Economic war

Price ceiling on Russian oil

Introduction

With this article I want to inform shortly about some issues with the planned oil price cap.

Why did I decide to dedicate an own article to this topic? Because I assume, that it will have a huge impact on the Western economy, in case it gets introduced. This article is not going to be as comprehensive as my major articles. Many details won’t be described. If you have further questions, use the comment section or join my Telegram channel to discuss it there.

Origins

Janet Yellen proposed in July 2022, to cap the price of the Russian oil sales. Why? Russia is one of the biggest oil exporters in the world. It gets huge amounts of money from these sales. Now the prediction by the United States is, that if a cap on the Russian Oil prices is introduced, Russia will have less money available, to fund the war in Ukraine. Sounds reasonable, from the Western perspective. It isn’t.

What is the Western plan?

The G7 powers are currently discussing to define a price on Russian oil. This price should be slightly above Russian costs to produce it. But at the same time, lower than world oil prices. It should be sufficiently high, that it still would make sense for the Russians to sell it.

I’m hearing proposals between 60-70$ per barrel. Which would be high enough, that Russia could still earn enough money. Moreover, it would put, in theory, pressure at the Russian government, to continue selling, because the Oligarchs and oil companies could press on it, to do so.

The abovementioned prices are coinciding with the planned price, for which the Biden administration is planning to replenish its strategic oil reserves. It has been depleted to a critical level, to lower the Oil prices in the US before the mid-term elections. It should help the Biden administration to not lose as badly as anticipated in the mid-terms, so it can continue financing the war in Ukraine.

How could the G7 enforce such a cap and why should other countries participate?

Well, the benefit for other countries would be, to be able to buy Russian oil cheaper, then market prices indicate. At least, as long as the market prices are above the defined cap. As far as I understood, the cap would be re-sat periodically, to be adjusted to market prices.

How to enforce it? Well, the standard procedure, that the United States are applying on friends, allies and partners. If you don’t comply, then you will get sanctioned. Moreover, Western insurance companies will be prohibited from insuring oil tankers, that are transporting oil, which is being sold above the capped prices. The sanctions have a direct effect since most insurance companies for oil transports are sitting in London.

It needs to be highlighted, that this oil cap will not apply on most G7 states. Most G7 states, were anyway forced, to totally abandon Russian gas. For example, the EU, which will be in force soon. The United States are always forcing all allies to sanction this or that but don’t abide themselves on such sanctions. There is a very high probability that the US won’t abide themselves on such a cap and continue buying Russian oil on market prices.

Russia’s dependence on Western currencies

The assumption is that Russia highly depends on Western currencies, to sustain its economy and the war. This assumption is wrong. Russia was cut off, from SWIFT. Not for energy and resources, but for the rest indeed. Most money, Russia earns in Dollar or Euro can’t be reinvested easily, since there are, due to sanctions very less possibilities, to spend it.

Russia has moved to trade in national currencies with partners. Gas trade is already switched to contracts in ruble.

Russia has prepared itself since 2014 for the scenario, of being cut off the trade with dollars. This is something the West still doesn’t want to accept. Russia is moreover preparing itself for the post-Dollar world. Most commodities are already domestically produced or purchased from friendly nations in domestic currencies. The resources are anyway from Russia.

This especially applies to military goods. It was the highest priority in import substitution. And what can’t be produced yet in sufficient numbers is being imported through China and India.

We can conclude that Russia is far less dependent on Western currencies, than Western nations would like to. I don’t want to say, though, that it is independent. That would be wrong as well. There are still many long-term contracts, debts and bonds with Western companies and states, that needs to be paid in Dollar.

There are still many questions open. Or I do not have the information, yet. What is with trade relations, where Russia already selling oil in local currencies? Are the local currencies, Yuan for example, to be calculated in Dollar, to measure, whether it is within the price cap or not? I don’t know.

Russia’s counter measure

We see here a further step towards the “great decoupling” between “the West” and “the Rest”.

The “Lloyd’s of London” exchange has been for centuries one of the most important places, to insure maritime shipping worldwide. China and Russia already planning to take over the insurance business for Russian oil tankers. Or tankers from third countries, like Greece, that are mainly shipping Russian oil. This indeed would be a huge financial blow to the Western insurers and a huge opportunity for Eastern countries to take over market shares. This would solve the problem with the insurance.

Russia moreover announced, that it won’t supply any oil to ANY country, that is not buying oil at market prices. This means: Either you buy on market prices or you get NO oil whatsoever. This applies to friendly nations as well.

Potential consequences for the world economy

The world can’t afford to NOT have Russian resources on the market, whatsoever. As I pointed out clearly in my article about “economics”. The resources, and one of the most important resources IS oil, are needed, otherwise the world economy would almost instantly crash, because the whole logistics chain would break down within months. As soon as the strategic reserves of the industry nations would be down. If the world supply is FAR less than the demand, this drawdown would be very quick. Why? We mustn’t forget that Russia is, depending on how you measure, either the biggest or the second biggest oil exporter of the world.

This is issue number one. No Russian oil = no economy and industry for the world.

Issue number two: Since oil would scarce dramatically, according to every market rule, the prices would go dramatically up. No. They would skyrocket. There would be immediately wars fought, to secure enough oil for the own market. Alexander Novak, the Russian energy minister said a few months ago, if an embargo by the Western states would be introduced against Russian oil, the prices in the West would go up to approximately 300$. Well, this was only for an embargo to Europe. Imagine, what would happen, if Russian oil would largely disappear from world markets.

As I said, skyrocketing prices, maybe above 500$ per barrel. And wars to secure resources.

Of course, this is theory since it won’t happen in this way.

All independent nations know about such consequences. So, they will never ever join such a mechanism. They would not have the benefit of having cheap prices but the disadvantage of having catastrophically high oil prices in the best case. And no oil in the worst case because of scarcity. And thereby no industry and logistics.

Of course, the so called Western “allies” (colonies/vassals) could be forced by their American “friends” to implement such ceilings and thereby losing access to Russian oil, without officially imposing an embargo against Russia.

One little additional remark. Russian allies and friends getting anyways discounts on Russian oil. Which means, that the world oil market is anyway already divided. Western countries are paying ever higher prices for energy, while “the East” is getting very advantageous prices and thereby getting ever more competitive against Western companies. A big change is coming, as already pointed out in several articles.

Potential US reasons

Who reads my articles, knows, that I think in scenarios and possibilities. That’s why I want to present again some possible scenarios, why the US could be pushing such a ceiling, even though the consequences are crystal clear to them.

• Strangling allies to win them as markets and eliminate them as competitors: (40%)

  As I pointed many times out, I don’t consider the strategic planners in the US as idiots. They know what they are doing. They simply can’t stop their downfall any longer since greater powers (BRICS/SCO etc.) are working hard, to ensure that. The US is therefore, as pointed out in my “Economics” article, working hard, to suck its “allies”, “vassals” and “friends” dry and eliminate them as competitors on world markets. Please read the article, for details.

• Sealing off completely “The West” from “The Rest”. The great decoupling at any costs: (40%)

  The US might want to seek to deliberately seal off itself and their “allies” from the emerging world order to still maintain some kind of hegemony, even though it is far smaller. This would lead into two separately existing world systems.

• Pure short-term thinking: (20%)

  What is unfortunately one the biggest weaknesses of Western politicians and planners? They are thinking mostly, of course not all, but the majority, only in periods of their responsibility for something. For a company, as a manager or for the consequences of their politics for a country as a politician. It is indeed possible, that the current US politicians are not considering the long-term consequences of their actions, since they assume, that they won’t be for much longer in power anyway.

I want to point out, that I give some 80% probability, that this price ceiling strategy is solely aimed against Americas own allies/friends/vassals/colonies.

Remember Nord Stream 1&2. As Blinken said. There are unique opportunities.