Since Russia invaded Ukraine in February, US energy policy has pursued two major, seemingly contradictory goals. The first is to keep global oil supplies high enough to keep prices tolerable and public support for sanctions strong. The second is to stifle Vladimir Putin’s war machine by stopping the flow of dollars that Russia earns by flogging oil barrels. Together, they form a circle that is hard to break because when supply closely follows demand amid a lack of new production, the withdrawal of any oil from the market mechanically triggers inflation. Still, the West has tried to defy the laws of physics by creating a growing array of measures to meddle in oil markets.
Those deployed so far have often been piecemeal and involved uncomfortable compromises. America enforced its own sanctions against Venezuela’s violent regime and on November 26 granted permission for Chevron, the US oil major, to increase its oil production there. America has also released huge volumes from its strategic oil reserves; the stockpile is now at its lowest level since 1984. The White House’s least productive effort was aimed at getting Gulf states to produce more. Within months of President Joe Biden punching Muhammad bin Salman, the Saudi ruler, in Riyadh in July, Petrostate and its allies in the Organization of the Petroleum Exporting Countries (OPEC) said they would cut output instead. On December 4, the cartel will meet again. It seems unlikely that a performance boost would help now.
Yet the West’s most carefully constructed campaign to outwit Mr. Putin has not yet begun. In June, the EU announced that on December 5 it would ban imports of Russian offshore oil, which a year ago accounted for nearly 2 million barrels per day (b/d), or 40% of Russia’s oil exports. It also said it would also ban European shipping service providers, tankers and insurance companies from helping non-EU buyers acquire Russian barrels they are avoiding – a powerful tool given the firms’ dominance of the global shipping market. America soon realized that together these two measures had the potential to squeeze global oil supplies. So she insisted on introducing a weakening clause: provided they agreed to pay the maximum price set by the G7 for Russian oil, non-Western buyers could continue to buy European insurance.
As we went to press, the level of this “price cap” was still being debated among Europeans. Some, led by Poland and the Baltic states, want the cap to be kept low to hurt Russian finances. Others, worried about their shipping industry or retaliation from Russia, want to keep it close to market levels. Rumors filtering out of the talks suggest it could end up near $60 a barrel – a discount of almost 30% to the current price of Brent, the global benchmark, at $84 a barrel – which is roughly what Russia is currently selling its crude for. . Whatever the outcome, one thing is certain. Never before has such a layered cake of measures hit the global oil market at once. Much of this has been telegraphed for so long that it can make few waves. But there are reasons to worry that this could rock the boat, at least for a while.
In an optimistic scenario, the sanctions package could succeed in reconciling the West’s two conflicting goals. The embargo would ensure Europe would no longer support Mr Putin’s war: the bloc still bought 2.4 million b/d of crude and refined from Russia last month. Meanwhile, the price cap, a US Treasury official says, would act as a “relief valve” to keep the global market in balance by allowing developing countries to buy Russian oil at a discount. Russia would get less money, whether those countries sign up to the plan or not, because the mere existence of the cap, or so America reckons, would strengthen their bargaining power.
Without a sufficiently low price cap, as is likely to be the case, the cost to Russia would be real but modest. It would add even more unpleasantness to what has been created by a wider arsenal of Western sanctions that may hurt Russia’s economy in the long term but have so far hardly proved definitive. Discounts that carry Russian stamps against regional benchmarks have widened in recent weeks, but remain well below those seen after the invasion. At least the embargo would not upset the oil markets – or so the commodity markets suggest. Brent futures, which in June indicated an annual oil price of more than $100 per barrel, are now closer to $85 (see chart panel). Most traders expect the shift in fuel flows to accelerate this year, with India and China taking over from Europe as Russia’s biggest customers.
This happy story assumes that no logistical snags will prevent a decade-old business formula from making a smooth but rapid transition. However, a less rosy scenario could see sanctions throw a spanner in the works by introducing unwanted friction. Three bottlenecks stand out: squealing tankers, the insurance gap and the global lack of risk appetite.
Start with tankers. Cyprus, Greece and Malta are so big in shipping that Europe’s ban on maritime services to countries that don’t sign up to the cap — and many of them, eager to support American meddling in commodity markets — have signaled they won’t. — could cause a major shortage of ships capable of transporting Russian oil. Claudio Galimberti of Rystad Energy, a data firm, predicts a shortfall of about 70 vessels with a total shipping capacity of 750,000 b/d that will last two to three months.