Political Implications of “Price Cap” on Russian Oil

In 2014, after the referendum on Crimea’s reunification with the Russian Federation, as well as in 2022, after the start of the special operation in Donbass, the Russian energy sector found itself at the center of sanctions imposed by the G7 countries, the European Union, and their allies. In line with Senator McCain’s view that Russia was nothing more than “a gas station masquerading as a country,” Global North believed that hitting the energy industry would lead to the collapse of the Russian economy, given its supposed total dependence on hydrocarbon revenues. Of course, Russia’s role in the energy sector at the global level has always been prominent, and prior to the conflict Russia was the second producer after the USA and the first gas exporter. Moreover, Russia was the third largest producer and second largest exporter of oil in the world, trailing only the United States and Saudi Arabia. At the end of 2021, the countries of Europe were the main buyers of Russian gas and oil. The oil sector was the hardest hit, as additional logistical restrictions were created and imposed on its sales. Despite the hostility of the Global North, it is not immediately clear how much the Russian oil sector has suffered in these two years. The International Energy Agency (IEA) showed that Russian oil (Urals) exports did not really collapse after all the sanctions were applied, targeting other buyers. Gradually, Russia has managed to reform its customer portfolio, particularly offering a significant discount compared to the Brent benchmark price, completely replacing export quotas previously reserved for Europe, the USA, and Great Britain.

In December 2022, realizing the potential failure of their sanctions policy, the G7 countries and the EU agreed to set a “ceiling” on the price for Russian oil at the global level: to avoid sanctions, potential buyers were actually prohibited from paying more than $60 per barrel of Urals. The introduction of this ceiling led to a new increase in the discount of Urals crude oil to Brent, which, however, never reached the June 2022 high of $34.85 per barrel. Although the current price difference between Brent and Urals is about $14 per barrel, since the beginning of 2024, the price of Urals has been consistently above $60 per barrel, supported by the prices of both WTI and Brent, which have started to rise again. In April 2024, the price of Urals went up to $75 per barrel. Further restrictions were also imposed on the transportation of Russian oil by sea, but volumes have always remained above 3 million barrels per day, and in March 2024, only 25% of the nearly 4 million barrels exported daily were sold at the maximum price of $60 per barrel. According to rough estimates, in 2023 alone, the losses of the Russian oil and gas energy sector amounted to about $100 billion, of which more than $34 billion is lost revenues from oil sales. However, it should be noted that with the price of Urals above $70 and the dollar exchange rate above 90 rubles, the Russian government’s budget does not seem to be “harmed” much, which makes the imposed sanctions ineffective. According to data processed by Bloomberg, in April 2024, oil revenues even doubled compared to the same month in 2023 and were slightly lower than in April 2022.

In December 2022, realizing the potential failure of their sanctions policy, the G7 countries and the EU agreed to set a “ceiling” on the price for Russian oil at the global level: to avoid sanctions, potential buyers were actually prohibited from paying more than $60 per barrel of Urals. The introduction of this ceiling led to a new increase in the discount of Urals crude oil to Brent, which, however, never reached the June 2022 high of $34.85 per barrel. Although the current price difference between Brent and Urals is about $14 per barrel, since the beginning of 2024, the price of Urals has been consistently above $60 per barrel, supported by the prices of both WTI and Brent, which have started to rise again. In April 2024, the price of Urals went up to $75 per barrel. Further restrictions were also imposed on the transportation of Russian oil by sea, but volumes have always remained above 3 million barrels per day, and in March 2024, only 25% of the nearly 4 million barrels exported daily were sold at the maximum price of $60 per barrel. According to rough estimates, in 2023 alone, the losses of the Russian oil and gas energy sector amounted to about $100 billion, of which more than $34 billion is lost revenues from oil sales. However, it should be noted that with the price of Urals above $70 and the dollar exchange rate above 90 rubles, the Russian government’s budget does not seem to be “harmed” much, which makes the imposed sanctions ineffective. According to data processed by Bloomberg, in April 2024, oil revenues even doubled compared to the same month in 2023 and were slightly lower than in April 2022.

So, the question arises: who pays for the consequences of jeopardizing production and sale of 12% of the world’s oil? Even without sanctions against Russia, supply pressures on the oil sector, which has long suffered from a prolonged lack of investment, and in the recent past has also been penalized due to energy transition global policies, remains high. In fact, today’s demand for oil is about 100 million barrels per day, but it is destined to grow further. Under the IEA’s zero-emissions scenario for 2050, demand for black gold would be grow steadily until 2030, reaching 108 million barrels per day. Thus, there is a likelihood of continued high prices, which, combined with disastrous expansionary monetary policy by central banks, will create an inflationary spiral that will be difficult for any country to resist.

Many countries are already facing this new reality. In March 2022, after the price of oil surpassed $120 per barrel, the US President decided that in order to stop the spike in gasoline prices in the United States, which had increased from $2.9 to $4.3 per gallon in March 2022, national Strategic Petroleum Reserve (SPR) resources should be mobilized. Thus, Biden agreed to place 180 million barrels on the market by December of that year, i.e., approximately one million barrels per day for six months. Strategic Petroleum Reserves were established in December 1975 after the Arab embargo of 1973-1974. When President Ford signed the Energy Policy and Conservation Act, the goal was to stockpile up to one billion barrels, and beginning in 1977, after the storage facilities were completed, the first barrels of oil started coming in. Although withdrawals had already been made for years, Biden’s decision in 2022 was unprecedented: between March and December 2022, the US strategic oil reserve fell from 566 million barrels to 372 million barrels, and an additional 38 million barrels were designated as “forced sales.” Despite US Department of Energy (DOE) purchases, taking into account data for the period from the end of 2022 to April 2024, SPRs showed a further net decline by 7 million barrels.

When Hillary Clinton raised a scandal by accusing Russia of colluding with Trump in the 2016 US election, she didn’t realize that the next Democratic president would do everything in his power to make sure her prophecy “definitely comes true.” She was only wrong in naming the actual actors and tools that would bring her prophecy to life. The impact of sanctions against Russian oil, of which the US is the staunchest supporter, could play a significant role in the country’s elections. In the first months of 2024, sales of Russian crude oil and petroleum products to “unknown” third parties “accidentally” increased, and, although the Ministry of Energy claims that from 2023 onwards, there were no more purchases of Russian oil, it should be said that these data refer to direct purchases, but do not take into account purchases made through intermediaries. The case of the US Pentagon itself is extremely curious, using the Motor Oil Hellas refinery in Greece, which purchases Russian oil from Turkey.