Prof. ST Hsieh
Director, US-China Energy Industry Forum
626-376-7460
October 7, 2022
Of course, the global crude oil pricing power is changing after the war in Ukraine broke out on February 24, 2022. But a balance of supply and demand for pricing any commodity never changes. Often, the demand side is in a weaker position than the suppliers. A glaring case in front of us is the “west” imposed sanctions on Russian energy backfired badly for the Europe: it is now staring down an unprecedented energy crisis even before the brutal winter starts.
The west proposed “Russian oil cap” has many pitfalls and it may not work. It could make Europe’s energy crisis even worse. So, “Efforts to cap Russian oil prices would fundamentally shift the balance of power between OPEC and the West.” But the “west” does not include “Europe” and only the US counts. Europe is not even the global energy demand center, Indo-Pacific has the dominating energy consumer nations around the world namely China, India, and Japan.
The war in Ukraine has no end in sight, Europe is already sapped by an economic crisis which will morphed into recessions soon. It means that Europe’s economic prowess is declining fast. Even if the war in Ukraine were to end soon, the post war reconstruction will take decades if not more. Most significantly, EU solidarity is already cracking, and the future of EU is very uncertain. NATO must contend with a weakened Russia for years to come: a wounded bear is dangerous.
The US will lock horns with China for years to come. Unless the US changes her energy policy soon, fossil energy output will be limited. Thus, the US will not be able to satisfy Europe’s fossil energy demand. EU must seek fossil energy imports from global market by paying high prices. There are no other options.
On the other hand, Russia and OPEC have lined up as OPEC+ which controls their oil production levels that directly influence the global oil prices. The war in Ukraine “facilitated” a tighter coupling between Russia and China at least in terms fossil energy import-export. Russia is also exporting oil to India directly. These developments make it clear that Europe’s proposed price cap on Russian oil will not work as desired, similar to all the failed seven rounds of sanctions against Russia.
Yes, the “west” is leading the effort to “deconstruct” the existing global energy market. The US is leading the effort, but Europe is forced to change because of the energy crisis. We do not know what the new market system looks like, but we are sure that, unfortunately, Europe will only be on the receiving end.
A Russian oil price cap would fundamentally shift the balance of power between OPEC and the West, analyst says; ‘the rules of the game are changing’
Brian Evans Fri, October 7, 2022 at 9:41 AM
- Efforts to cap Russian oil prices would fundamentally shift the balance of power between OPEC and the West, according to an oil analyst.
- A scheme that tilts pricing power to the US and Europe “shifts the unspoken red lines,” tweeted Karim Fawaz, director for energy advisory at S&P Global.
- “The more tools consumers have in their oil market intervention toolbox – the harder it becomes for OPEC to maintain price and political leverage.”
Karim Fawaz, director for energy advisory at S&P Global, tweeted Thursday that OPEC fears a price cap and sees the measure as a check on future efforts to move markets.
The US and G7 are pushing the price cap as a loophole in the EU’s upcoming embargo on seaborne Russian crude that prevents a supply shock and limits Moscow’s export revenue. But Fawaz said the details of the price cap, some of which have yet to be determined, are not what has OPEC worried.
“An effective price cap would provide large consumers (i.e. the West) with a functional and tested foreign policy tool that fundamentally changes the leverage balance that has defined oil markets for decades,” he explained.
He added that a price cap is a more attractive solution compared to imposing secondary sanctions or directly targeting of oil flows.
And it would follow the Biden administration’s extensive use of the Strategic Petroleum Reserve to counter rising crude prices, representing another tool at the West’s disposal, he said.
“The more tools consumers have in their oil market intervention toolbox – the harder it becomes for OPEC to maintain price and political leverage,” Fawaz said. “Effective targeted sanctions & price cap on one of the largest oil exporters in the world that keeps oil flowing but prices set in Washington and Brussels shifts the unspoken red lines. Where the US sees a carrot, OPEC sees a stick that could eventually be pointed its way.”
So far, the European Union has approved a cap on Russian oil prices as part of its latest round of sanctions. But top Russian customers like China and India haven’t signed on, raising doubts on how effective a cap would be.
Still, even if it ends up being ineffective, it reflects a creative effort by the West to develop new foreign policy tools, which is what really concerns OPEC, Fawaz said.
“More broadly, oil and gas markets are being deconstructed, commercial and political relationships are being redefined and the rules of the game are changing,” he said. “OPEC clearly does not like the direction in which it’s heading but fighting the tide may just accelerate it.”
EU Gets Wake-Up Call as Energy Costs Threaten Solidarity
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(Bloomberg) — European nations criticized Germany’s €200 billion ($196 billion) aid package to shield consumers and businesses from gas price spikes, saying it’s a warning sign for the European Union to act quickly to address the crisis.
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