The West is looking to cap the price of Russian oil with the double goal of restricting Putin’s oil revenues while lowering energy bills for the biggest oil-consuming nations, including the top oil consumer, the United States. The success of such a plan is far from certain, but there may be one surefire way to restrict Russia’s oil revenues—a way that would also inflict pain on the West. We’re talking about a recession.
For weeks, the U.S. and partners have been discussing ideas, including banning all services enabling Russian oil shipments unless buyers pay for Russia’s oil at or below a certain price. There are concerns that more restrictions on Russian seaborne oil would backfire, increasing international crude oil prices further and nullifying efforts to curb Putin’s energy revenues.
There is one scenario in which Russia will see its revenues from oil crumble. But it’s a scenario no policy maker in the West wants, and one that Putin will likely be happy about. This would be a recession in major economies, including the United States, with subsequent significant demand destruction that would drive oil prices down, reduce revenues for Russia, and even free some spare oil production capacity from what is now believed to be a record-thin cushion to absorb further shocks.
“Recession or a business cycle downturn would change the circumstances and make it possible, at least in principle, to replace Russia’s petroleum exports with more barrels from other suppliers,” Reuters market analyst John Kemp wrote in his column this week.
The markets, including the oil market, already fear that recession is a distinct possibility in the very near future as the Fed and other central banks aggressively hike interest rates in their efforts to combat the highest inflation rates in more than forty years.
If a possible recession leads to sizeable demand destruction, tight market balances will loosen, and supply from other major producing regions could replace the loss of Russian barrels.
However, some analysts say that an inflation-driven recession may not be devastating to oil consumption globally as it could only dent the expected demand growth, not actually reduce world demand year over year.
Meanwhile, policymakers in the U.S. and its allies are scrambling for a solution to limit the most significant contribution to Vladimir Putin’s war chest—oil revenues.
Despite the lowest Russian crude and oil product exports since August 2021, Moscow saw its oil export revenues rise in June, the International Energy Agency (IEA) said in its Oil Market Report this week.
Russia’s combined crude and product exports in June dropped by 250,000 bpd from May to 7.4 million bpd, the lowest level since August 2021. But at the same time, Russian oil export revenues increased by $700 million in June from May due to higher oil prices, to $20.4 billion, which is 40% above last year’s average, the IEA said.
The current tight market balances and higher oil prices help Russia boost its oil revenue despite a drop in exports. Shipments are likely to further decline when the EU embargo on Russian seaborne oil kicks in at the end of this year. Without measures to cap the price of Russian oil and without recession, Putin will continue raking in oil export revenues amid high oil prices.
Related: Europe’s Big And Expensive Energy Mistake
So the price cap is now the focus of Western efforts to cut money flows to Russia and ease consumer pain at the pump.
“A price cap on Russian oil is one of our most powerful tools to address the pain that Americans and families across the world are feeling at the gas pump and the grocery store right now,” U.S. Treasury Secretary Janet Yellen said on Thursday at the Group of 20 finance ministers and central bank governors meeting in Bali, Indonesia.
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“A limit on the price of Russian oil would deny Putin revenue his war machine needs and would build on the historic sanctions we’ve already implemented to make it more difficult for him to wage his war or grow his economy,” Secretary Yellen added.
“It will also aid in maintaining the global supply of oil, helping put downward pressure on prices for consumers in America and globally at a time when energy prices are spiking,” she noted.
By Tsvetana Paraskova for Oilprice.com
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1- Global oil demand and prices are overwhelmingly determined by supply and demand. The supply is affected by the tightness in the market, shortages and the fast-shrinking global spare oil production capacity. The demand side is influenced by the fundamentals of the market including robustness of both global oil demand and economic growth. Nothing could change this cardinal fact now or ever.
2- A recession in normal circumstances does indeed lead to a shrinking of the economy and demand destruction. However, we are in very unusual circumstances of shrinking capacity and tightness in the market. In such circumstances, recession could hardly lead to demand destruction since there is hardly enough supply to destroy. So we end up with a unique form of recession where demand and prices continue to surge and the global economy continues to shrink.
3- A capping of prices of Russian crude and petroleum products is a stupid idea which was doomed to fail from the start. Putin could kill it with a scratch of his pen. Russia could afford reducing its crude exports by 3.0 million barrels a day (mbd) without affecting its revenues. Both capping and recession will result in further rocketing of oil prices thus overwhelmingly harming Western economies while Putin continues to rake in cash.
4- Western sanctions have so far failed miserably to hurt the Russian economy. It is in fact doing the opposite, namely hurting the economies of those imposing them.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert