Sharper’s Victims In The Energy Poker

The long-suffering negotiations on enforcing price caps for Russian oil have stalled. The EU, in conjunction with the G7, is discussing a price cap of $65-70 per barrel, which is even higher than the current quotations of the Russian Urals crude. But the greed of European states has traditionally played its decisive role. Poland and the Baltic states found the offer too favorable for Moscow. Greece and Malta, on the contrary, were for the upper limit of the cap as they did not want to lose the huge market of the Russian oil shipping. As a result, no value satisfactory to all was found and adoption of the limit requires the consent of all member countries of the European Union.

However, the torpedoing of the cap may be a subtle game of the senior EU partners – Germany, France and Italy, passed off as a quarrel of the European “kids”. The fact is that the oil price cap is not the initiative of the European states. The order came from the US: according to the media, it was Secretary of the Treasury Janet Yellen who proposed to limit the price of Russian oil. In turn, Yellen’s initiative is an attempt to put another patch on the broken mechanism of sanctions against Russia. Despite all the efforts of the “collective West” to bring down Russia’s economy, this year export earnings will break all records, and the trade surplus will set a maximum. According to the forecast, Russia’s GDP will shrink by 3% while the authors of the sanctions expected a drop of 8-10%.

Thus, it cannot be ruled out that France, Germany and Italy are trying to get out of the sanctions merry-go-round, because the picture now looks not very decent. Let’s imagine that a few wealthy burghers decided to play energy poker with a sharper. In the beginning, the stakes were small. They played for coal. As a result of the game Europe was forced to buy thermal coal this summer at $400 a ton, while Russian companies, not without losses, but were able to redirect their supplies to China, India, Africa, and the Middle East.

Energy poker
Germany’s Chancellor Olaf Scholz, US President Joe Biden, Britain’s Prime Minister Boris Johnson, Japan’s Prime Minister Fumio Kishida, European Commission President Ursula von der Leyen, European Council President Charles Michel, Italy’s Prime Minister Mario Draghi, Canada’s Prime Minister Justin Trudeau and France’s President Emmanuel Macron have taken seats at a round table as Ukraine’s President Volodymyr Zelensky addresses G7 leaders via video link during their working session on June 27, 2022, at Elmau Castle, southern Germany

The second one is a gas game. As a result of the game, European prices soared tenfold and Gazprom, the main supplier, saw its physical exports plummet to four times last year’s average. But the average monthly revenue from the sale of gas (including LNG) doubled. Meanwhile, Europe has shut down several major plants to save gas and is preparing for rolling blackouts this winter. Even the fiercest opponents of Russian gas, such as Finland, are forced to buy it, but via bypass schemes, via German intermediaries. The total losses from the energy crisis in Europe are still to be calculated, but we already know the number of European budget subsidies to compensate for energy expenses: they will amount to about one trillion euros, which is comparable, for example, to two GDP of Austria.

After losing two games, it seems that the gamblers have begun to suspect with whom they are playing energy poker. At the same time, the patron suggests raising the stakes once again and starting to play for high stakes – on oil, the most capacious energy market.

But Europe understands: the idea of introducing a cap is not a good one. One after another, the big U.S. banks and traders working in the real energy market have stated that the mechanism of limiting the price of Russian oil is easy to bypass. In addition, over the last year Russian oil producers have shown a master class in finding new markets. The same sea exports to Europe have fallen threefold since the beginning of the year. At the same time in ten months of 2022 Russia increased its oil production by 2.4%. This means that oil producers were able to find sales for all their oil, which Europe rejected, and in general they are ready for the European oil embargo, which will begin to work on December 5.

But Europe, on the other hand, is not yet ready. According to analysts’ calculations, by spring a diesel deficit will arrive there. And while the Americans could lend a helping hand with gas, albeit an expensive one, with oil it is more difficult. Right now, U.S. oil inventories are at a six-year low for this time of year; diesel inventories have never recovered. Moreover, this fall, to rebalance the domestic market, U.S. traders themselves were re-buying diesel bound for Europe.

Therefore, the risks from implementing a price cap for Europe may be greater than the pluses. In addition, the oil market is the only energy market that has not yet begun a sharp upward movement. And it seems it just needs a reason. An oil price trajectory that replicates coal or gas in 2022 would cause any politician to panic. If oil doubles in price, it will mow down all economic growth in China and India and drive Europe and the U.S. into recession. A threefold increase would bury international trade and tourism in their current form. Further growth is the painful but quick death of the world economy. For Europeans, receiving new bills for heat and electricity, the new gas station prices could be another reason to question their governments about their efficiency.

At the same time, Russia is ready to play this game as well. Both the Russian Foreign Ministry and the press secretary of the Russian President Dmitry Peskov have already repeatedly stated: “oil will not be sold to countries that impose a price cap”. “Russia is ready to reduce production in response to the cap,” echoed Russian Deputy Prime Minister Alexander Novak. However, the gas market has shown: there is often nothing wrong with reducing production. The increase in prices more than compensates for the forced decline in operating activity of companies.

It should be noted that not only the outcome of another adventure with energy prices may not be in favor of the European countries. They can finally lose their advantageous position on the global market as a whole. According to the Swiss newspaper Le Temps, as Western countries have reduced their economic cooperation with Russia, other countries that have not joined the sanctions have taken their place and continue to do so. For example, Russia’s trade turnover with many G20 members has increased sharply, fourfold with India, threefold with Turkey, twofold with Brazil, and more than 1.5 times with China.

Another characteristic circumstance is that some countries that supported the anti-Russian sanctions, bypassing the restrictions, did not reduce and even expanded trade with Russia. The most striking examples are Spain, Switzerland and Japan. The winners are those who understand the game. The rest are victims of their own naivety.

Reposts are welcomed with the reference to ORIENTAL REVIEW.
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