My Asharq: Russian oil to India, 40% of imports, ousting traditional suppliers. Borell wanted resale into EU stopped. OPEC: Investments must surge before Q3/Q4 Asian demand-&-price rise.

Asharq, Dubai (Bloomberg, Dubai) in Arabic, with Jordanian expert and myself. 22May23

I was interviewed (from Berlin) by Asharq (Bloomberg affiliate, Dubai) along with Jordanian oil and energy expert, Dr. Amer Al-Shobaki (from Amman) about OPEC leaders’ assertions that oil investment is urgently needed to meet an expected demand rebound, especially in Asia, in Q3-Q4 2023.

Investments have been precariously low for a long time, throughout COVID and even after 24 February 2022, with Russia’s full-on aggression against Ukraine. Now, OPEC warns later-2023 can bring big price spikes and deep economic problems.

I should note, this demand-and-price boost would be a boon to Russian oil prospects, complicating Ukrainian’s allies’ attempts to reduce Russian profits and limit the resale of Russian oil refined in India into the EU market. The G7/EU adoption of the USA-proposed price caps on Russian exports (enforced via constraints on oil-shipping insurance and banks financing of sales) instead of an “old fashioned” sanctions regime (such as specifically restricting Russian oil sales step-by-step via direct and secondary sanctions) has finally begun to significantly restrict the normally expected flow of oil-export-sales cash back into Moscow’s coffers, after a 2022 of high oil prices and big Russian profits.

EU foreign minister, EU Commission foreign relations chief, Josep Borell, has rightly asserted that the EU must do something to stop this resale, by adjusting present sanctions. However, unfortunately, the EU has now backed down substantially on this ambition.

On air, I referred to a report by Marianna Pàrrage, at Reuters, whose research has found that from January to April 2023, 1.69 million barrels per day (mbd), and 1.89 in May, went to India, now accounting for about 40% of India’s total. This has displaced India’s former Venezuelan, Middle East, African and USA suppliers.

Interestingly, Moscow has sold its oil, banned in the EU, USA and UK, in a very focused manner to India, China and Turkey, not Asia broadly, which could have market advantages for Moscow.

Aside: It is notable that Russia limits its sales largely to these three states: China, India and Turkey, while there’s obviously a large market in Asia beyond these three it could sell into, and perhaps instigate a bit of a bidding competition to raise its price. However, Putin/Moscow doesn’t. Why? For geostrategic reasons. Moscow desperately needs maximum support (or, at a minimum, neutrality) from these key powers vis-a-vis its Ukraine aggression.

I first heard this assessment from the consistently insightful Christof Rühl, now at USA Colombia University’s energy center, on a Zoom conference with Ben Aris @bneeditor of BNE IntelliNews.

To Asharq, I emphasized that the intention of the USA/G7/EU sanctions was never to stop Russian exports but to keep its oil on the market and thereby prevent global market shortages and price spikes (a big preoccupation of the Biden administration, for lamentable but stuck, bipartisan-dysfunctional USA domestic reasons, which are well known).

So, the novel price cap the USA administration strongly lobbied for in the EU, now $60/bbl, has been intended to limit Russian profits from its oil exports, but also explicitly intended to keep Russian oil on the market.

I emphasized on air that I have recommended an EU/G7/USA schedule be announced for squeezing this price cap stepwise lower over the coming year and more.

On the one hand, this would have an impact rather like that of “old fashioned” sanctions, slowly reducing the amount of oil Russia can continue to market to China, India, Turkey and elsewhere. But, there is another important positive effect it would have, as well as a complication it might provoke.

First, the key advantage of this pre-published rate of decrease of the Russian oil price cap is not only that it would begin to severely limit Russian profits, it would also be a strong signal to the market and to the world’s oil producers that their market share will soon grow, to replace lost Russian barrels.

This signal would incentivize investments, which take time to bear fruit. It would ramp up investments in OPEC states, the USA and elsewhere.

Short-term, this would help to address the problem OPEC leaders see developing later this year. However, more importantly, it would begin to adjust global production for an era in which Russian oil is largely replaced by flows from esp. OPEC and USA-shale producers.

As I and others, such as Fadi Birol, have consistently noted: there is ample oil elsewhere in the world to, step-by-step, begin replacing Russia’s large present day considerable share of global market exports.

Given the very real possibilities of social, economic and political upheavals within the Russian Federation as a consequence of what will likely be a prolonged and losing war campaign against Ukraine, it is only rational to force Russian oil stepwise from the market in a well-signaled and as-orderly-as-possible manner, so as to incentivize the time-and-finance-consuming process of oil production expansion investments literally everywhere else, investments that need to be made to prepare for a new “1989”-like collapse of Russian output. Some sort of published, committed-to schedule of constantly lowering the price Russia can obtain from exports, eventually into the unprofitable and/or unsustainable (for the Russian budget) range, would help this mammoth global oil investment-and-production expansion process to begin.

Secondly, the complication is that this could also instigate Russia, at some point, to simply dump its oil on markets, weaponizing it in a price war, if it cannot attain minimal profitability.

Yes, this could be very disruptive internationally. However, IMHO, it would lead to even stronger unified efforts by the G7/USA/EU together with OPEC to finally stop Russian oil flows. One should recall how effectively and rapidly the Saudis were able to, n March 2020, smash the very ill advised and adventurist Russian “oil price war,” causing Russia to rapidly lose the war. (some links on this previous and possible future scenarios: A talk I gave last year; a Polish media interview: “Europe can replace Russian oil & gas by 2027” but “in war there are casualties” (Pl. & Eng.), and a series I wrote ← Decoding the Oil Price War 1: Moscow seized COVID crisis to hit US shale, force sanctions relief (and the two following posts, from 2022)

Comments most welcomed and solicited. Any reproduction or quoting with full attribution to this page is welcomed.

Best, Dr. Thomas O’Donnell, (in Berlin)

Global Fellow (external) of Wilson/Kennan Center, Wash., DC | @twodtwod | | | LinkedIn


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