The editors of the New York Times have realized something that occurred to me back in February. When the price of oil doubles you can sell half as much and make as much money doing it. More even. Here’s their insight:
Nations seeking to help Ukraine are aiming at the wrong target. They have focused on reducing Russia’s energy exports instead of reducing Russia’s earnings from energy exports. Russia is exporting less oil but, in a perverse twist, it is earning more money, according to the Center for Research on Energy and Clean Air, based in Finland. The sanctions have raised prices, more than offsetting the decline in exports. In May 2022, Russia earned 883 million euros per day from oil exports, up from 633 million euros per day in May 2021.
The situation is about to take a turn for the worse. New sanctions that the European Union and Britain have agreed to impose on Russia by year’s end are likely to drive oil prices even higher. Some analysts warn that the price for a barrel of oil could exceed $200, well above the spike in the early weeks of the war, when oil prices topped out around $124. That could easily push Western economies into a recession.
Here’s their prescription:
The Biden administration has a plan that could avert this crisis. It would establish a buyer’s cartel — an agreement among Russia’s customers to put a price ceiling on Russian oil. That ceiling would be significantly lower than the current market price, sharply reducing the role of Western consumers in funding the Russian military. But the price would still allow Russia to make some profit, so that it has an incentive to export its oil to members of the cartel. Some of the key participants in the plan, including the United States, have banned the importation of Russian oil, but other nations that America hopes to enlist, notably India, continue to import large volumes of Russian oil.
It is an audacious and untested idea. It also appears to be the best available option. If it works, it could deprive Russia of revenue without devastating the economies of nations that are trying to support Ukraine.
A “buyer’s cartel” is a completely fine idea but I’m skeptical it will be effective for a number of reasons. The first reason has to do with the structure of cartels. In general for a cartel to be effective, the participant that buys (or sells) the most must participate. In the case of Russian oil that’s China and China is not participating in the sanctions against Russia. Does anyone expect China to join a buyer’s cartel promoted by the U. S.? I don’t.
The second reason I’m skeptical has to do with the quality of Russian oil. Crude oil is rated based on viscosity (“heavy/light”) and sulfur content (“sweet/sour”). Here’s a graph illustrating the grades of oil from different sources:
Even when Ural crude is blended with West Siberian oil it’s pretty sour. That means it’s dirtier and requires more to refine. Germany and Netherlands don’t import Russian oil preferentially; they import it because they get the best deal for doing so. Otherwise they’d avoid it because of its cost. Which takes us to my last reason.
For the buyer’s cartel to work, the members would need to be willing to do without. Germany in particular has shown no willingness to do that. I doubt the cartel would hold.
So, go ahead. It’s certainly worth a try. Just don’t expect too much from it.
….and, would we have to enlist all these oil machinations if the US had only stayed the course of energy independence that was achieved in the prior administration?
I don’t believe the situation would be much different regardless of what we did. The issue is Russia’s major customers of which we are not one.
Alex Tabarok advocated a tax on Russian oil as a more efficient approach:
https://marginalrevolution.com/marginalrevolution/2022/04/tax-russian-oil.html
It at least gets around the problems of a cartel being unified by its least invested member, and it doesn’t require as much direct Russian acquiescence. And I don’t think Germany is the issue as much as Dave does; Germany is what got Europe in this mess, but it expects to divest from Russian oil by December 31st. There are less-wealthy, landlocked countries that can’t do so, but a tax brings in revenue.
Maybe Germany expects the war to be over by Dec 31. Future commitments are cheap.
First of all, it is US/UK/EU that is isolated in the world, not Russia. Not one country in Latin America (including Mexico), or Africa, or the Middle East (including Turkey and Israel), or Asia (except for a handful of US military allies) supports the sanctions. Even Hungary doesn’t.
The other problem with a cartel is that the US/UK/EU is really, really hated by the rest of the world, because of a century or more of brutal colonialism. The US suppression of the Moro uprising, which was a continuation of the 300 year Moro fight against Spain, resulted in 1 million Filipino deaths. The rest of the world is enjoying Europe’s pain.
So there is no buyers cartel to set up. It’s a fantasy.
The proposal to impose exorbitant import duties on Russian oil is merely a variant of the buyers’ cartel, and equally absurd.
Beyond that, Russia runs trade surpluses without oil and gas exports. The Russia federal budget is in balance with oil at $40/bbl. The cartel would have be huge, much more than the EU, to have serious impact.
And then there is the fact that Russian oil represents 10% of world supply. It is the third largest oil producer, close to Saudi Arabia, but significantly behind the US.
They export about 8 million bbl/d, of which 4.5 million bbl/d goes to the EU. That is 34% of the EU oil imports. The great majority of this is crude, but the EU (and US) also import refined products from Russia, especially diesel.
There is no way this can work. Russia can halt all exports to EU, and its economy will still rumble along. On the other hand, Russia can collapse the EU economy simply by withholding all export to the EU.
Yet another example of US/UK/EU delusion and fantasy. Putin and Xi are not delusional. They are rational and patriotic, and they seek benefits for their peoples and countries.
It won’t work for reasons cited by Dave and other commenters. Jan, however, was closest. Energy – currently coal, oil and gas, – is the lifeblood of a modern society. It is strategic. We should have been developing more and more N American based resources for years. That we haven’t been sober strategists is a national disgrace.
But as I have noted, we are not a serious society today. Never realized global warming calamity, NIMBY postures with respect to mining strategic materials, short term advantage in reliance on Chinese production, crazed obsessions with race politics, a person’s so-called pronouns, and of course government encroachment and redistribution of wealth all dominate the national discourse. These supposed concerns are manufactured to create voting blocks and seek political gain, power and money. To think otherwise is naive.
Bob observes that Russia and China’s leaders seek benefits for their citizens. Uh, maybe. Or maybe not. I think they share the Washington disease of naked self interest and the people be damned. However, I do believe they are rational. And they are positioning themselves better right now than the west.
The Biden Administration had an explicit goal of raising the price of oil and curbing use. They have subsequently reiterated it and claimed its the perfect rationale for solar and wind. The political consequences they attempt to slough off on Putin’s war. Spare me. One has to ask if they are really that concerned about the current energy environment. Resorting to Rube Goldberg schemes like manufactured cartels would certainly be an indicator.