[Right: Video in English. Below: Arabic version]
The US administration asserts that Kyiv’s drone strikes on Russian refineries threaten to cause higher oil prices. However, as I have argued since early-mid-March (Kyiv Post, USA press, USA press, Polish press), this is not logical (to first order). What undoubtedly alarms DC is that Kyiv has demonstrated that – if it chose to – it could also disrupt the three big Russian westward-facing oil-ports that handle 60% of Russian exports to the global oil market, undoubtedly causing a global oil-price shock. But, fear of such a shock might be overblown. [1]
The USA, EU and G7 have been relying on an oil-price-cap sanctions to limit Russian oil-export revenues. However, this complex approach has only had marginal success (Ref.: data from Bloomberg, CREA, Kyiv School of Economics, Breugel Russian Crude-Oil Tracker). It has long been clear this approach cannot produce a sharp reduction of Russian oil-export revenues.
From about October of last year, the USA OFAC (Office of Foreign Asset Control) in the Commerce Department, the Justice Department and State Department all made a huge new effort to see that Russian oil, especially that shipped to India, but to China as well, would not fetch more than the permitted $60 per barrel. But, the limited impact of this campaign has now dwindled, and at most seems to have at best shaved off 8-9% from Russian oil-export revenues for a limited time.
Meanwhile, surprisingly, Ukraine now demonstrated it could hit Russia’s three main westward-facing oil-export ports, one on the Black Sea and two on the Baltic, physically cutting Russian export volumes. But, it has not done so. This restraint is likely in deference to USA concerns over the price of oil in a presidential election year, and for allied economies generally. Indeed, it was such concerns over gasoline prices that moved the USA to convince the EU not to sanction Russian oil exports outright in the months after the full scale invasion of February 2022, but instead jointly adopt the oil-price-cap scheme.
In yesterday’s interview, I noted that, if Kyiv did decide to hit one or more of these ports, indeed this would cause a huge shock to the world oil market, However, I tried to show that this could and should be prepared for, in which case the shock should have a limited duration.
Let’s do a back-of-the-envelope calculation.
Russia exports about 4.7 mbd. and something like 60% goes via these three western ports (some is still exported via pipelines, but this is a rough estimate). So, perhaps up to 2.8 mbd goes via these ports. Say Ukraine hit all three hard, and repeatedly. If this took out, say 75% of this oil, that’s about 2 mbd lost to the global market, out of a total daily global supply of about 102 mbd.
As I pointed out in the interview, OPEC+ has about 6 mbd of capacity shut in due to its market-price-control efforts. Some of this is Russian capacity, but about 3 mbd is Saudi, and the UAE has the next biggest portion. If the Saudi spare-capacity were brought online in the wake of any Ukrainian attacks on Russian ports, this would largely undo the global oil market shock, at least after a few days or at most a few weeks. In addition, as I said, the IEA Strategic Petroleum Reserves (SPR) system requires all OECD states to hold at least 90 days of their countries total imports in storage. If the SPRs were released as needed, the shock would be further diminished.
Of course, if Kyiv waits several months or longer to hit Russian oil-export terminals, the world economy might by then be using more oil, and it would be proportionately more difficult to adjust to the loss of Russian oil exports, as there would be less global spare capacity. However, if there is a strong signal to the market — say by Kyiv starting to pick away at these ports for most of a year with relatively minor hits, before really hitting them — then producers could also begin investing in expanding production capacity. As everyone knows, there are abundant proven reserves of oil in the world, outside of Russia, that remain undeveloped, which could be stepwise brought online to replace Russian exports. And I have little doubt that the Saudis, UAE and other OPEC producers would mind taking over Russian export markets if the opportunity were handed to them.
Consider too that Kyiv could alert the Saudis, USA and other IEA allies what was about to happen, giving everyone time to prepare against the initial shock.
One problem is that, in the short term, a price spike could compensate Moscow for its loss of export volume and even increase its export revenues. However, the price spike would be a strong market signal, and if Kyiv made it clear that the disruption of Russian oil ports will persist long term, then other producers would feel secure in investing to bring more oil to market. As the price fell back to its secular levels, Russia would be left with significantly less import volumes and revenues. This success would incentivize allies to assist Ukraine to find ways to further physically diminish the amount of oil Russia can export by sea.
In my view, only some process such as this, which reduces physical volumes of Russian oil exports can significantly reduce Russian export revenues, its main source to finance its war in Ukraine.
— So, I answered three questions posed by Sky News. As they are not translated from Arabic in the video above, here they are in English (my responses are in English in the video).
Let’s start from the main reasons for oil price rises?
• Although the bombing of Russian refineries affects Russia’s revenues, America urged Ukraine to stop these attacks. Is the economic cost of these attacks higher on the American economy than the Russian economy?
• Don’t you think that the Ukrainian attacks on Russian refineries represent a serious threat to the global economy, with OPEC Plus adhering to the agreement to reduce production?
• After the bombing of the Iranian consulate, do you worry that there will be an Iranian response that will lead to a comprehensive war that ignites oil prices in the world, or do you think that fears of a broad Iranian response are unjustified?
• In your opinion, after the recent rise in oil prices, has the path towards $100 per barrel become more realistic?
— Here are some further reading/references, where Helma Croft, commodities analyst at RBC Capital Markets, interviewed by CNN, and a Woods-Mackenzie report both support my analysis that the fear that Ukraine might hit Russian oil ports, not Russian refineries per se, which would cause the oil price to spike … and is most of concern to the White House.
[1] Note: The USA administration also insists it does not support Ukrainian strikes inside Russia generally, and Sec. Austin said this wee Kyiv should hit “other targets”. It is not clear if this is merely a public posture crafted to avoid unnecessarily emboldening Russia to retaliate against NATO countries, or if it is a genuine “timidity” towards Russia, as the minority leader of the House Foreign Affairs Committee, Michael McCaul, accused National Security Advisor Jake Sullivan of having.
The Global Barrel 