Flaws in the oil buyers’ cartel plan
THE drive to set up an oil buyers’ cartel to strike at Russia seems to be gathering pace. The idea of an oil monopsony has been kicked around since the first oil price shock in the 1970s when Opec tripled the selling price of oil. Now the Biden administration has taken up the proposal as a way to reduce funds that Russia uses to finance its war on Ukraine.
The plan is to set a price cap alongside the December implementation of the European Union’s restrictions on insurance for transporting Russia’s oil. The EU plans to ban seaborne imports of Russian crude and refined fuels. The mechanism to enforce this ban singles out insurance companies that indemnify the ships that carry Russian oil. It is reasoned that since only a handful of US and European firms offer the specialised insurance and re-insurance products for oil tankers and specialist vessels, forcing them not to provide cover will restrict Moscow’s ability to export its oil.
Under the Biden administration plan, participating countries would agree to cap Russian crude at a substantially lower-than-market price. The goal would be to set prices slightly above Russia’s marginal cost of production to cut its profits. The West’s insurance firms would be forced to refuse offer cover for ships that carry Russian oil sold above the capped price.
At this point, it should be noted that Russian oil production has already been collectively under sanction since Russia’s annexation of Crimean in 2014. There are sanctions against the export of oil technology to Russia. These sanctions focus on deep-sea drilling, Arctic drilling, and shale oil production. Since the Ukraine invasion, technology sanctions have been expanded, forcing some Western oil technology companies to exit the Russian market. These sanctions have been imposed in the expectation that, if they work, such measures would limit Russia’s ability to maintain its oil production - in the medium term.
But will the latest planned combination of sanctions work in the short term? Unfortunately for the West, the oil is a fungible commodity and the oil market is complex. All the previous sanctions that have been imposed so far have had the effect of boosting the oil price. The result has been that the West and all other oil importers are suffering a bout of inflation. Oil exporters, including Russia, have benefitted, selling less crude for a higher price.
Pressure to get Saudi Arabia and other oil producers to pump more oil have failed. On Aug 3, Opec Plus, as the organisation is now known and which has Russia as a co-chair, made it clear Moscow’s membership is vital for the success of any agreement on output levels.
More importantly, even if a buyers’ cartel is set up, there is no certainty Russia will sell oil at the capped price. What if Moscow decides to withhold supply -- for a few months at least? Russia is the second largest exporter of crude behind Saudi Arabia and its supply volume cannot be replaced quickly. Prices are then likely to go through the roof. The poorer countries, already suffering from disruptions to the grain trade because of the Ukraine war, will see their fuel import bills explode. A review of the scheme before the global economy suffers a shattering blow would be prudent.
