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Nov 8, 2022
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The Big Seven are blowing bubbles. Oil

The Big Seven is blowing bubbles.  Oil

Photo: Sergey Bobylev / TASS

Australia has agreed with the G7 countries to set a maximum fixed price (price ceiling) for Russian oil, Bloomberg reports.

According to the publication, they plan to introduce new rules in three stages: first (from December 5, 2022) for crude oil, then for diesel fuel, and finally for products with a lower cost.

According to the source of the agency, “the price cap will be reviewed regularly” as this will “improve market stability and simplify compliance to minimize the burden on its participants.”

Earlier it became known that the EU and the US have finally set the date for the introduction of marginal prices for Russian oil – December 5.

This idea was discussed on September 2 at the summit of G7 finance ministers, who agreed to link the introduction of a ceiling on oil prices from the Russian Federation with the sixth package of EU sanctions introduced in the summer. Then, we recall, based on the assessment of Europeans, according to which about 90% of oil and oil products entering the EU are delivered by water, it was decided to impose a ban on the sea transportation of Russian oil from December 5, 2022 and oil products from February 5, 2023.

The maximum price is still unknown, the introduction of price restrictions in the range of $40-60 per barrel was initially discussed. G7 leaders have said they want to cut Russia’s revenues in order to prevent it from conducting a special operation in Ukraine, but at the same time not completely deprive it of the ability to profitably produce oil for sale.

According to the head of the US State Department Anthony BlinkenRussia will not stop selling oil when a price ceiling is introduced. The question is who will support this idea.

G7 countries? Let’s say. Although it is already known that not all. In Japan, the head of Itochu, a member of the Sakhalin-1 consortium, Masahiro Okafujideclared that they “would not survive” without imports of Russian energy resources. The Minister of Economy, Trade and Industry Yasutosa Nishimura called Sakhalin-1 a valuable source of fuel outside the Middle East, making it extremely important for Tokyo.

EU? It is worth recalling that they failed to make a pan-European decision. Hungary, Cyprus, Greece and Malta opposed and received a grace period to join the price ceiling.

At the same time, it is not known how other oil sellers will react, because even if we hypothetically assume that Russia agrees to sell oil at a lower price, this will affect global fuel prices. It is clear that Russia will not agree to this, as our top officials have repeatedly stated, but still an attempt to introduce a price ceiling could cause a price storm.

Which, by the way, can cause the opposite effect, which is also understood in the West. According to the forecast of the Secretary General of the International Energy Forum (IEF) Joe McMoneagleafter the tightening of energy sanctions against Russia, the price of oil could easily fly above $100 per barrel.

At the same time, last month Bloomberg published data from a survey of experts who concluded that Russia can safely reduce oil production by 3 million barrels per day without harm to its fields. However, according to experts, a reduction of even 1.5 million barrels could “immediately create pressure on the markets.”

As the Russian Ministry of Finance announced the other day, the average price of Urals oil in October 2022 was $70.62 per barrel. At the same time, in monthly terms, the brand rose in price for the first time since February.

At the same time, the budget includes the parameter of $70 per barrel, Deputy Prime Minister Alexander Novak called it “a comfortable price that today can be taken as a basis.”

There are a lot of questions. And you should first answer the main one. Who wants to take part in this? Australia? Will anyone even notice her participation?

“Australia is 0.11% of our crude oil exports,” explains Deputy General Director of the National Energy Institute Alexander Frolov. None of the big buyers were interested.

“SP”: – Countries G7 and so impose an embargo. Will it be a loss for Russia or not? How much oil was sold to these countries?
– Part of the “Big Seven” has already imposed an embargo. This is primarily the United States. And part of the “Seven” received an exception (Japan). Add the European Union here and we get about 4.5 million barrels per day of oil exports (crude oil and petroleum products), for which new markets need to be found. A significant part of these volumes has already been redirected to other markets.

The world oil market is a system of communicating vessels. There is no oversupply right now. If the EU and the States have abandoned our oil, then they will have to withdraw the necessary volumes from other markets, and our black gold will come there.

“SP”: – Who is the ceiling for? Who will comply with it? Which countries do you think would agree and which would not?
Australia agreed. New Zealand and Norway may agree. South Korea reflects.
The essence of the system of marginal prices is an attempt to make friends between the idea of ​​punishing Russia and the need to preserve the market share of Western companies that provide maritime transport of oil and petroleum products.

“SP”: – For some reason, Blinken is sure that Russia will sell oil to those who set the “ceiling”. Where does this confidence come from? How justified is it?
– The ceiling will be set at a level that will provide our companies with a profit. At the same time, they will be able to use the usual channels of sea supplies. According to the US leadership, this will be enough for us to agree.

“SP”: – And how will the OPEC countries react to the introduction of the ceiling? And will it affect world oil prices?

OPEC will be wary. This system can affect prices in two cases: if we agree to participate in this circus, or if large buyers agree to participate in it, but we refuse. In the first case, a price war among manufacturers may begin, and in the second, there will be a significant shortage.

“In theory, those who started it will observe it,” he said. Advisor to the President of the Russian Association for Baltic Studies Vsevolod Shimov.

– The G7 countries and Australia have publicly announced the introduction of a ceiling on the price of Russian oil. Theoretically, other allies and satellites of the West can also join, for example, South Korea, with which consultations were also held on this topic. It is likely that many EU countries will join. Surely there will be attempts to make this a consolidated position of the European Union, although I am not sure that this will succeed.

“SP”: – How will the Arabs and other oil producers react to this idea in general? Will this cause an uncontrollable price storm in the market?

— Oil producers, of course, do not need such a “cartel of buyers”. In general, this is an unprecedented event in its own way. The actual rejection of market principles, moreover, by those who used to speak the loudest about the sacredness and inviolability of the principles of a market economy. The consequences of this, of course, will be far-reaching.

“SP”: – Anthony Blinken has already said that Russia will not stop selling oil when a price ceiling is introduced. What is his confidence based on?

— Confidence is based on the fact that Russia will not be able to quickly reorient its supplies. The main consumer of Russian oil is the EU countries, and the entire infrastructure is sharpened for this. And if the majority of EU members, especially its economically developed western part, take a consolidated position, Russia may indeed have problems. It is possible to reorient oil production to China, but not immediately, and there is a risk of being in a monopoly dependence on a single buyer, who will also begin to dictate his terms. Other markets are far away and require expensive logistics, and will also be subject to pressure from the “civilized world”.

“SP”: – Perhaps the goal is to change the logistics of the global energy market – to close Russia to Asia, cutting it off from Europe. What does the US gain from this?

– It is quite possible that the United States is trying to kill two birds with one stone – to create problems for Russia and hook Europe on its oil, as they have already hooked it on expensive liquefied gas.

“SP”: – There is also speculation that rising prices and the creation of a “paper gas” market are helping to keep the dollar afloat, giving the appearance of an increase in the backing base for dollar settlements. Inflation is represented as the growth of world GDP, and in the logic of the model it is represented as economic growth. Is it possible to agree with this?

— Yes, this is a characteristic feature of the modern world economy. It is largely virtual and based on unsecured securities rather than real assets. Inflating another bubble, this time an oil one, is a very likely scenario. But only this bubble will burst sooner or later. As a result, a few will get rich, the rest will sit in a puddle.

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