Why G7 Price Capping Won't Harm Russia, But Will Accelerate Inflation & Recession in the West
18:16 GMT 05.12.2022 (Updated: 17:31 GMT 26.12.2022)
The G7's $60 price cap on Russian crude came into force on December 5, sending oil prices 3% higher. However, energy experts told Sputnik that this might only be the beginning of the rise in petroleum costs.
"The Western price cap on Russian oil exports is neither viable nor enforceable," Dr. Mamdouh G. Salameh, an international oil economist and global energy expert, told Sputnik. "Therefore, it is doomed to fail miserably. Russia, the global oil market and OPEC+ will reject it. Russia has repeatedly said that it will halt its oil exports to any country or group of countries which implements the price cap. This will lead to shortages in the market and a further rise in oil prices, with the Brent crude oil price surging to $100-$110 a barrel before the end of the year."
Similarly, Brent crude is projected to reach $110 per barrel in 2023 by the Bank of America (BofA). BofA has warned about additional risks which could increase pressure on prices. Thus, according to the bank, Russia's refusal to sell oil to any price-cap participants may result in the crude exports slumping by up to one million barrels per day, which could give a further boost to petroleum costs. Purportedly, this could add $20-$25 per barrel to the already soaring Brent price.
Possible supply disruptions from OPEC producers or OPEC+'s decision to slash their collective output could exacerbate the uncertainty engulfing the world's energy markets. OPEC+ members are interested in $100 or higher for Brent crude: with the exception of Russia, they need the increase in oil costs to balance their budgets, according to Salameh. He forecast that the cartel will assess the market reaction to the price cap and then take action.
"In the unthinkable event that the market didn’t react to the cap, then OPEC+ will cut production to ensure the stability of prices and supplies," the energy expert presumed.
Earlier, the club of 23 oil producers met on December 4 to discuss the course on output policy. They agreed to stick to the existing policy of reducing oil production by two million barrels per day until the end of 2022.
"Clearly oil prices will rise," said Tom Luongo, financial and political commentator. "So, in 2023, expect another major wave of inflation based on rising energy prices, China re-opening its economy putting upward pressure on metals prices and food shortages from the EU’s war on the periodic table of elements."
23 November 2022, 13:33 GMT
Why G7 Plan to Punish Russia Fails
"If the declared purpose of the cap is to force a reduction in Russia’s oil export revenues, then it will fail completely," said Salameh.
"Russia doesn’t lack buyers for its oil. Moreover, it has a large fleet of oil tankers to carry its oil exports around the world. Russia neither needs to use Western shipping nor Western insurance companies for its oil cargoes. Its customers will provide their own insurance for their Russian oil imports. Even if Russia sold slightly less oil, its revenues won’t be reduced since it will benefit from higher oil prices," the oil economist continued.
The G7 plan relies on prohibiting shipping and insurance companies from providing services to Russia unless the latter agrees to sell its crude for $60 per barrel or less. However, Moscow made it clear that it wouldn't bow to the Group of Seven demands and instrumentalized its own fleet of tankers and insurance companies.
In May, Rosneft PJSC and Gazprom Neft PJSC, the country's two major oil producers, started increasing the bookings of tankers owned by Sovcomflot PJSC
, Russia's largest shipping company specializing in the maritime transportation of hydrocarbons.
Moreover, the Western mainstream press reported in December that Moscow had acquired an additional 100 vessels. The Russian National Reinsurance Company (RNRC) and IPJSC Ingosstrakh are said to become major insurers for Russian oil carriers.
The G7 cap and the EU's embargo on maritime imports of Russian crude, which also came into force on December 5, will not deter Russia in any significant way from exporting or shipping oil, said Luongo.
"What will happen is the map of oil delivery worldwide will change," the commentator noted. "Energy that flowed west will now flow east and south. The ESPO pipeline will see full utilization as demand from SE Asia rises (…) China and India are already filling the gaps. Russian oil will be blended in the Bahamas or other storage ports and then sent back to EU refineries."
29 November 2022, 15:45 GMT
Winners & Losers of Price-Capping Scheme
Russia could emerge as the ultimate winner whilst the EU will be "the ultimate loser with living standards of Europeans already crumpling and the bloc's economy balancing on the verge of a harsh recession," according to Salameh.
Ultimately, the EU has fallen prey to Washington's geopolitical grand design, the oil economist said. He believes that the US sparked the Russo-Ukrainian conflict not only to try to weaken Moscow and disrupt the Russia-China tandem, but also to "destroy the EU as an alliance and make its individual members vassal states and puppets such as Poland, Latvia, Estonia and Lithuania and also erase the euro from the face of the earth."
"The EU will face continued high energy prices, a net outflow of capital from lack of investment and a falling currency as their competitiveness on the global market collapses," echoed Luongo. "Considering that they are also an unreliable trade partner who constantly changes the terms of contracts while they are still active, will see trade that used to be done with it go somewhere else. All they are doing is ensuring no one will want to do business with them after 2030, hence their full-throated support of further war with Russia over Ukraine."
The G7 price-capping initiative could have a further adverse impact on the global economy, suggested Suranjali Tandon, assistant professor at the Delhi-based National Institute of Public Finance and Policy.
According to her, soaring oil prices could lead to political difficulties for countries coping with a rise in inequality and could also hinder the global economic recovery. At the same time, the world's Western-centric financial system may further shift away from G7 currencies with the increase in shipping and insurance services from third countries, she believes.
5 December 2022, 10:15 GMT
"It is possible that similar to experiences from the SWIFT ban, the shipping and insurance industry may evolve whereby the G7 may witness a decline in the use of the services by countries not imposing such sanctions," Tandon suggested.
In addition to that, divisions within the European bloc will likely grow, according to the Indian academic. Politicians in each European country are answerable to their own electorates for Brussels' inconsistent energy policies amid the Eurozone recession and energy crunch. The first cracks have already appeared in the EU's unity with sporadic protests erupting here and there across the Old Continent
, with people urging their respective governments to lift energy sanctions on Russia.
"Higher energy prices will put political strains as domestic consumers and industries ask for price stability," Tandon said. "This may be further exacerbated as the country wise impact may vary. It also has implications for EU countries such as Greece and Germany that account for a large share of shipping services and may lose out on revenues on account of lower oil exports from Russia."
However, the US is also likely to be adversely affected, according to the observers. Salameh presumed that "since [the US] will be paying higher prices for its oil imports of more than 9.0 million barrels of oil a day (mbd)," this will widen its budget deficit and accelerate inflation and therefore recession.
All in all, G7 countries are set to pay dearly for their energy adventurism and face a worsening economic crisis, the energy expert concluded.