2023-06-26 20:01:07
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It makes sense to lower the price ceiling for Russian oil transported by sea to $45 per barrel, says a group of Western economists led by MIT professor and former IMF chief economist Simon Johnson. In work published two weeks ago, experts studied the effects of the $60 price ceiling introduced by a coalition of Western countries six months ago.
Sanctions imposed in December banned Western companies from providing transportation, insurance and financing services for Russian oil if it was bought at a price above $60 per barrel. Since these services were used for 70% of Russian oil exports, there were fears that sanctions would prevent significant volumes of oil from Russia from reaching the market, causing oil prices to skyrocket. But that did not happen. Moreover, the introduction of a price ceiling, if it is set below current world prices, can even lower them and make them more stable, follows from the work of economists.
Under the current price ceiling, the best scenario for the oil producer may be to increase production, which in the case of Russia can be explained by two effects, they write:
The first is “want cash now”, in which the producer, at known fixed prices, increases supply and uses the proceeds from the sale of oil to finance current consumption. The second is the “smoothing effect”, in which exporters increase production at low oil prices to compensate for the lack of oil revenues.
The authors of the study also concluded that if the price ceiling is set below current world oil prices, this leads to an increase in oil exports. “This is an important and perhaps surprising finding, which contradicts the popular notion that producer incentives to extract [нефти] decrease when prices are capped,” the paper says.
Since the introduction of the oil price ceiling in December 2022, oil prices have stabilized and slightly begged. The price of a barrel of Brent reference grade immediately reached the lowest level for the entire last year, $76. Since May of this year, the cost of a barrel of Brent has remained steadily below $80 per barrel. According to the International Energy Agency, following the emergence of the maximum selling price for oil from Russia, the average price for oil of the Russian grade Urals was below $60 per barrel.
Under these conditions, Russia increased the volume of oil exports. In March he has reached record levels since April 2020 – 8.1 million barrels per day, IEA experts pointed out. 91% of these exports went to India and China, should from the calculations of the analytical company Vortexa.
In April Russia exported more oil and oil products than in any full month since the invasion of Ukraine began, the IEA estimated: 8.3 million barrels per day. For comparison: in 2021, Russia exported an average of 7.5 million, in 2022 – 7.7 million barrels per day.
Russian statistics on oil and gas production closed – Ministry of Energy classified this data following the start of the war, citing the fact that it might be used for “additional pressure on the Russian market and its participants.” In mid-May, Deputy Prime Minister Alexander Novak declaredthat Russia has reduced production to a target level of 500,000 barrels per day agreement with OPEC+ countries. But the Saudi authorities accused Moscow is that it does not fully comply with the agreement to reduce production.
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In the long term, the price ceiling may not be an effective tool, the authors of the study admit. Now Russia builds up A “shadow” oil tanker fleet that will allow it to sell above the cap.
For these reasons, economists are proposing to lower the oil price ceiling from $60 to $45, which would reduce Russian budget revenues. “Continued Russian aggression contributes to the lowering of the ceiling, as oil revenues are the main source of war funding [в Украине]”, Simon Johnson explained in an interview with The Bell.
In general, depending on how successful the price ceiling for Russian oil will continue, this mechanism may become the basis for future sanctions and global economic and trade policy in general, economists conclude.
With the introduction of restrictions on the supply of Russian oil, the coalition countries agreed that they would revise the price ceiling every two months. But since the beginning of the year did it only once – and the limit of the selling price for oil from Russia remained at around $60. At the same time, three European countries – Estonia, Lithuania and Poland – offered lower the price ceiling to $51.45. Such a decrease would reduce Russia’s income by $650 million a month, representatives of these states noted.
The main practical conclusions made by the authors of the article:
1) it is advisable to reduce the price cap to regarding $45 per barrel. This will lead to a decrease in the “wealth” of Russia and increase incentives to increase production;
2) the creation of a shadow fleet should be discouraged in order to increase the long-term effectiveness of the price cap.
There are some difficulties with these arguments.
First, Russia is pursuing a strategy of voluntary production cuts. Moreover, it does it together with the OPEC+ countries. That is, Russia is also pursuing its own policy, which aims to counteract the price cap mechanism. Secondly, it is rather difficult to assess the effectiveness of the price cap mechanism due to the fact that most of the time it was in effect, Urals prices were below $60 per barrel. On the one hand, it can be argued that it was the price cap that led to this, but it seems to me that these are still more global factors. Thirdly, the implementation and control of the price cap by Western countries has already declined significantly in recent months. In particular, this is evidenced by the fact that freight rates for the supply of Russian oil to India have decreased by regarding half since the beginning of the year. Finally, now Western shipping companies account for less than 30% of Russian oil shipments, regarding 20% are transported by companies owned by Russian owners, the share of the so-called “shadow fleet” (registration under a flag of convenience, no data on ultimate beneficiaries) is regarding 30-40% . It will probably grow in the future. It is not very clear how Western countries can seriously impede this process.
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