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"Is This The Only Way To Curb Russian Oil Revenues?" by Tsvetana Paraskova

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EXCERPT - ...there may be one surefire way to restrict Russia’s oil revenues—a way that would also inflict pain on the West. We’re talking about a recession. [See John Kemp quote]

Is This The Only Way To Curb Russian Oil Revenues?

By Tsvetana Paraskova - Jul 16, 2022, 6:00 PM CDT

  • The West is looking for ways to reduce Putin’s oil revenues while.
  • The idea of a potential price cap on Russian oil is gaining traction.
  • One surefire way to restrict Russian oil revenues, however, would also inflict pain on the West.

The West is looking to cap the price of Russian oil with the double goal of restricting Putin’s oil revenues while lowering energy bills for the biggest oil-consuming nations, including the top oil consumer, the United States.  The success of such a plan is far from certain, but there may be one surefire way to restrict Russia’s oil revenues—a way that would also inflict pain on the West. We’re talking about a recession.

For weeks, the U.S. and partners have been discussing ideas, including banning all services enabling Russian oil shipments unless buyers pay for Russia’s oil at or below a certain price. There are concerns that more restrictions on Russian seaborne oil would backfire, increasing international crude oil prices further and nullifying efforts to curb Putin’s energy revenues. 

There is one scenario in which Russia will see its revenues from oil crumble. But it’s a scenario no policy maker in the West wants, and one that Putin will likely be happy about. This would be a recession in major economies, including the United States, with subsequent significant demand destruction that would drive oil prices down, reduce revenues for Russia, and even free some spare oil production capacity from what is now believed to be a record-thin cushion to absorb further shocks. 

“Recession or a business cycle downturn would change the circumstances and make it possible, at least in principle, to replace Russia’s petroleum exports with more barrels from other suppliers,” Reuters market analyst John Kemp wrote in his column this week. 

The markets, including the oil market, already fear that recession is a distinct possibility in the very near future as the Fed and other central banks aggressively hike interest rates in their efforts to combat the highest inflation rates in more than forty years.

If a possible recession leads to sizeable demand destruction, tight market balances will loosen, and supply from other major producing regions could replace the loss of Russian barrels. 

However, some analysts say that an inflation-driven recession may not be devastating to oil consumption globally as it could only dent the expected demand growth, not actually reduce world demand year over year. 

Meanwhile, policymakers in the U.S. and its allies are scrambling for a solution to limit the most significant contribution to Vladimir Putin’s war chest—oil revenues.

Despite the lowest Russian crude and oil product exports since August 2021, Moscow saw its oil export revenues rise in June, the International Energy Agency (IEA) said in its Oil Market Report this week. 

Russia’s combined crude and product exports in June dropped by 250,000 bpd from May to 7.4 million bpd, the lowest level since August 2021. But at the same time, Russian oil export revenues increased by $700 million in June from May due to higher oil prices, to $20.4 billion, which is 40% above last year’s average, the IEA said. 

The current tight market balances and higher oil prices help Russia boost its oil revenue despite a drop in exports. Shipments are likely to further decline when the EU embargo on Russian seaborne oil kicks in at the end of this year. Without measures to cap the price of Russian oil and without recession, Putin will continue raking in oil export revenues amid high oil prices. 

Related: Europe’s Big And Expensive Energy Mistake

So the price cap is now the focus of Western efforts to cut money flows to Russia and ease consumer pain at the pump.  

“A price cap on Russian oil is one of our most powerful tools to address the pain that Americans and families across the world are feeling at the gas pump and the grocery store right now,” U.S. Treasury Secretary Janet Yellen said on Thursday at the Group of 20 finance ministers and central bank governors meeting in Bali, Indonesia. 

“A limit on the price of Russian oil would deny Putin revenue his war machine needs and would build on the historic sanctions we’ve already implemented to make it more difficult for him to wage his war or grow his economy,” Secretary Yellen added.  

“It will also aid in maintaining the global supply of oil, helping put downward pressure on prices for consumers in America and globally at a time when energy prices are spiking,” she noted.  

By Tsvetana Paraskova for

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Who Really Controls The World’s Oil Reserves?

By Irina Slav - Jul 14, 2022, 7:00 PM CDT

  • A new study has some bad news for private oil companies scrambling for more supply.
  • As much as 65 percent of the world’s discovered oil and gas reserves are under the control of national oil companies.
  • To make matters even more complicated, more than 40% of new discoveries were made by national oil companies, as well. 

Big Oil majors in the United States have found themselves the target of much pressure to boost production lately, as prices go wild amid a tight—and tightening—market. At the same time, the U.S. government, as well as the EU, have been looking all over the world for more supply. Wood Mackenzie just had some bad news for them. According to new research from the energy consultancy, more than half—65 percent, to be precise—of the world’s discovered oil and gas reserves are under the control of national oil companies.

The reason this is bad news is that, in addition to (National Oil Companies) NOCs like Saudi Aramco, QatarEnergy, and Abu Dhabi’s Adnoc, these companies also include Russia’s Rosneft and Gazprom, the National Iranian Oil Company, and Venezuela’s PDVSA.

These seven companies, according to Wood Mac analysts, can keep producing oil and gas at their current rates for the next 40 to 60 years or even longer if they tap their spare capacity.

It was national oil companies that have made 41 percent of all new oil and gas discoveries in conventional resources since 2011, the analysts noted. What’s more, the NOCs’ share in new discoveries has been on the increase since 2018 as the energy transition push prompts the evolution of their exploration strategies, the report said.

In total, national oil companies have discovered more than 100 billion barrels of oil equivalent since 2011, the report said, which was twice what oil majors discovered. But not all is rosy for the NOCs. Unlike the majors, NOCs were significantly worse at commercializing these new discoveries, the Wood Mac analysts noted.

Two-thirds of what Big Oil has discovered since 2011 is considered viable and advantaged. On the other hand, two-thirds of what the NOCs have discovered is considered contingent.

This could, of course, change with the right incentive. Right now, however, it seems that the NOCs, especially in the Middle East, don’t have much of an incentive, especially as prices begin sliding under the weight of recession fears.

The fact remains, however, that most of the already discovered oil and gas in the world, two-thirds of it, is under the control of just seven companies, of which four are subject to sanctions from some of the world’s biggest oil and gas consumers.

Related: Armed Guards Raid Libyan National Oil Company As Political Shakeup Escalates

One might brush this off on the basis that these large consumers, in the face of Europe and the United States, notably, are moving towards an economic model much less dependent on fossil fuels than it has been hitherto.

An argument could be made—and it has been made by organizations such as Ember—that these barrels of oil and cubic meters of gas are future stranded assets that will fade into obsolescence before the middle of the century rolls around.

Just how valid such a brush-off or an argument would be, however, is a different matter. The last six months, and especially the last three months, have prompted some serious reconsiderations of priorities in European capitals and in Washington. Both have gone from staunch opponents of oil and gas to cautious defenders as energy security trumped emission fears for the first time in years.

As true as that might be, the governments of Europe and the U.S., two of the biggest consumers of oil and gas globally, believe that this refocusing on energy security will only be a short-term matter. Oil and gas will be necessary only for a few more years, their reasoning goes, until we build enough wind parks and solar farms. Coal, too. 

The fact that European buyers are signing long-term contracts for U.S. LNG, however, suggests something else. It suggests an acknowledgment that oil and gas might very well continue to be necessary for not years but decades to come.

And there are just seven companies that can keep supplying that oil and that gas for decades to come without regulatory, government, or activist investor pressure of the kind Big Oil has been subjected to in recent years—pressure that has been affecting its production rates. The future, then, belongs to national oil companies.

By Irina Slav for

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