G7 vs. Russia: Will Oil Price Caps & Embargos Even Work?!

About a week ago the G7 countries Implemented a price cap on Russian oil This came at about the same time that The EU was beginning its embargo on said Oil however will these actions have any Impact on Russia or could they backfire And send oil prices through the roof That's exactly what I'm going to be Covering in my video today so this is One you don't want to miss Thank you the war in Ukraine has been Going on for almost a year now this is In large part because Russia's oil money Machine has been printing cash As the world's second largest oil Producer Russia was well positioned to Benefit from The increased oil prices That its aggression has brought about In fact by some estimates higher energy Prices could see Russia earning 337 billion dollars in exports this year That's a 38 rise on last year naturally This meant that NATO and the West have Been zeroing in on that energy revenue And trying to slow it down of course This is easier said than done because There are many countries in the G7 and Those in Europe specifically who depend On this energy and oil This is something that I've talked about Ad nauseam on the channel and I'll link To my videos on it in the description For you guys now when it comes to the Oil Market these discussions have been

Going on for months for example the EU Oil Embargo was first agreed back in May When the block got an agreement together That would see 90 of their imports from Russia curtailed however some European Countries managed to get exemptions Specifically those that relied on Pipeline Imports now the price cap Discussion has also been going on for Some time there were concerns around the Impact that any cap would have on the Supply of oil hitting the market as the World's second largest producer if Russia were to curtail Supply it could Lead to a spike in oil prices more Generally and more pain for consumers Around the world When it comes to the free market you can Only dictate a price until the seller Decides that said price is economically Unfeasible Some countries in Europe also worried That should they go ahead with the cap Then they would be precluded from Getting any supplies from Russia other Countries like Poland Estonia and of Course Ukraine thought that the cap was Too low and that it wouldn't have that Much of an impact on Russian oil Revenues In the end they settled on a 60 per Barrel price cap this was a carefully Chosen price level because it wasn't too Far off from the price that Russia was

Actually getting for its oil on the Global market in fact when it comes to The Ural grade of crude the cap is above Its market price the theory here was That the Russians wouldn't be too Perturbed by the price cap and would Still consider supplying the oil to the Market even to those countries that Agreed to sign on to the cap itself Indeed Russia's foreign minister gave The clearest sign yet that Russia would Be doing this because quote the cap was Irrelevant moreover there were many Questions as to the efficacy of any cap To begin with because Russia could Always root its oil supplies to Countries that didn't abide by the cap So this begs the very important question Why implement it at all Well one of the dominant lines of Thinking around the price cap is that Even if other countries that did not Abide by the cap bought oil from Russia They would still have some additional Bargaining power that's because they Know that Russia would not be able to Sell above 60 in the G7 and EU so they Could conceivably name any price above Sixty dollars indeed countries like India and China have been using this Tactic to get low-priced Russian oil Then there's also the much broader Question around how the price cap could Impact Russia's ability to move its oil

To any countries in the first place That's because the price cap will also Apply to those firms in the G7 and the EU that play a key role in servicing the Russian oil industry this includes ships Registered in these countries as well as Insurers and reinsurers basically these Companies are prohibited from Transporting or servicing any ships or Cargo that are carrying Russian crude That was bought at a price above the cab That means that even if Russia was able To make a deal with other countries to Buy oil above the cap it could not rely On a steady stream of tankers and ships To get that oil to the market I should Also note that not all Russian grades of Crude oil trade at or near the price of The cap for example there is the key Espo grade that's currently trading at Seventy dollars this is the grade that's Delivered to Asia and it's uncertain Whether this crude will fall under a cap However this uncertainty does create a Massive pain for Russia and adds to the Cost of getting the goods to market the Cap would also cap the revenue that Russia could potentially earn should oil Prices ever shoot up again this is Something that Russia fully capitalized On in the wake of the invasion and Something that it may not be able to Rely on going forward Moreover the price cap is not fixed

There is an adjustment mechanism that Can move the price up or down if EU Countries are able to find alternative Sources of crude and are no longer Scared of Russian threats then they Could easily adjust the cap even lower For example there are many who think That a 50 price cap would cut into Russia's earnings such that it would Make it impossible for the country to Balance its budget called fiscal break Even even then though this would still Be above the cost of production so it May still be high enough to keep Russia Selling into the market that said there Are still many oil analysts who think That this price cap is likely to have Limited impact and could potentially Even mean more Russian oil being rooted To Asia and countries not subject to the Cap there's also the potential that the Shipping of Russian oil won't be too Badly impeded even if shipping companies Abide by the cap That's because Russia could always Arrange separate side deals with the Customer country in question for example If a country exported another commodity That Russia relied on then they could Arrange a deal whereby the shipment Would officially be for oil below the Cap but still see Russia getting a fair Payment in other Goods you should also Consider that it's quite hard to verify

That crude ownership has been bought Below the cap documents are easy to fake Or indeed that a tanker is carrying Russian oil to begin with oil is a Fungible asset Of course Russia may not even have to Use Western ships and fleets that's Thanks to what is called the shadow Fleet for those unfamiliar this is Basically a non-compliant fleet of ships That service and transport the crude oil Of countries that are subject to Sanctions this has grown considerably Over the past 10 years in response to U.S sanctions on Nations like Venezuela And Iran there is no single definition Of what makes up the shadow Fleet but Some tankers change Flags turn off Transmitters send out decoy signals or Even swap oil at Sea remember it's Fungible Others paint over ship names falsify Documents and mask control over vessels Through layers of ownership and Management firms now I'll leave links to This Wall Street Journal article that Talks about this Shadow tanker Fleet It's a fascinating read anyways the tldr Is that Russia has been building up this Shadow Fleet not only is it marshaling The current Shadow Fleet to its Shores But the fleet is expanding at a rapid Pace as ship owners look to buy a Flotilla of second-hand tankers so if it

Were to come to it that these Western Ships couldn't transport Russian crude Then this Shadow Fleet could be ready to Pick up the slack and ship this oil to The markets willing to pay a decent Price that's the price cap though let's Now turn to the oil embargo as this is Likely to have a much larger impact not Only on Russia but also on Europe The band that went into effect was for Russian seaborne crude which accounts For 90 of the eu's oil imports a special Exemption was made for pipeline crude in Order to incentivize Hungary Slovakia And the Czech Republic to sign on to it About 34 of the eu's oil imports came From Russia in 2021. this is still a Massive hole to fill and the burden is Not born equally across member states For example Hungary was reluctant Because sixty percent of its oil imports Came from Russia there were also a Number of other EU countries that Depended on this oil you can see which Ones over here What that means is that the EU will have To replace this Russian crude with crude Sourced from other countries and to be Fair it has been quite active in its Diversification strategy over the past Six months for example as you can see in This chart over here Russian oil imports Have now fallen down to 21 of the total Amount

This is thanks to imports from North America Africa and the Middle East Whether the EU can keep up with the Embargo will depend on how the oil Market reacts to these measures Something I'll touch on in a bit that Said when it comes to the EU Russia Business relationship for oil Russia Needs the block more that's because the EU is a big customer for Russian oil and Other products in fact in 2021 the EU Was the top destination for oil exports At 29 of Russia's total it also Imports A great deal of Russian oil products at 16 percent of the total as seen here now That's important to note because while The band currently only applies to Seaborne crude on the 5th of February This will also move to include all Refined oil products moreover Germany And Poland are getting ready to stop Purchasing oil via the druzma pipeline Due to begin in 2023 so if you include Total crude imports as well as find Products then over 50 percent of Russia's exports were going to Europe Last year if Russia is going to try and Sell this crude it's going to have to Find new buyers however that's easier Said than done firstly when it comes to That lost pipeline oil it's going to be Difficult to just reroute for example it Can't just send this crude oil to its Espo East Siberia Pacific Ocean pipeline

That's because it's already running at Near full capacity sending Asia oil It'll also struggle to ship this oil in Tankers as Russian oil ports are also Running at full capacity of course the Price cap and The Limited tanker Fleet Is further adding to the pressure there Moreover even if Russia offers favorable Terms for the oil well below the cap Countries like India China and Turkey Already have long-term Supply contracts With countries in the Middle East Contracts that need to be fulfilled Russia also needs to be careful about The implications of relying on too few Buyers That's why it's been doing deals with Smaller countries like Sri Lanka and Cuba still it seems unlikely that these Countries will be able to effectively Make up for the lack of demand coming From Europe okay so that's the Embargo The broader question now is how will all Of these measures impact on oil prices Next year Well that's pretty hard to tell that's Because the price of oil is driven by Both supply and demand moreover there Are questions as to how Resolute the G7 Will be when it comes to sticking with These punitive sanctions in the face of Sky-high oil prices but let's start with The broader Supply on the oil market for One you have to consider what OPEC will

Do in the New Year about two months ago It cut production down to 2 million Barrels per day a move which predictably Angered the US and the G7 this is Something I talked about in much greater Detail in my video linked to below Well a day before the cap was meant to Go into effect OPEC plus held an Emergency meeting Some members were worried that the cap Could see A disruption of about 1 to 1.5 Million barrels a day hence they Advocated for increasing the agreed Output on the other hand however the Saudi energy Minister wanted to further Bring down output over fears that Lackluster Chinese demand was weighing On Energy prices in the end however it Was agreed that they would keep oil Output at the previously agreed two Million barrels per day The broader question for the market is What happens to demand over the coming Months China has been one of the biggest Drags to World growth given its zealous Approach to zero covid indeed there were Concerns a few weeks ago that the Surging numbers we're seeing in China Could lead to more of those repressive Lockdowns the type that crushes both Human rights and oil demand at the same Time however it seems as if things could Be beginning to turn as China has now Scrapped some of the most unpopular

Measures including testing and Quarantine requirements the speed with Which Beijing is abandoning its pandemic Measures is pretty unprecedented and This has of course led many to believe That oil demand is likely to spike Globally once China's economy fully Opens up for example according to Singapore's foreign minister China's Reopening will have a much bigger impact On oil prices than any cap on Russian Oil if significant oil and comes back Online in China then we could start Seeing prices rise globally again this Then begs the broader question of what It will mean for the oil markets with a 60 cap where prices are way above that Cap China can always increase the price that It pays for Russian crude however Countries in the G7 can't this means That Russia could continue to root Global oil shipments away from these Other countries to those that are not Enforcing the cap this could have Further upward pressure on the oil Prices and further Drive Russian Shipments away from G7 and EU countries There's also the broader question of Whether Russia is likely to respond more Forcefully to the cap there has been Talk of legislation in Moscow that will Ban oil sales to any country that Implements it now whether this is just

Bluster it's hard to tell but the higher The price goes the less Russia will ship To these countries and the less it will Care about a complete ban of oil Shipments of course the cap is dynamic Next year there will come a time when The price would need to be reassessed if The G7 raises it then that will show Russia that they're toothless if they Bring it down again then they could do Damage to Russia's fiscus but also to Oil consumers in their respective Countries we mustn't forget that there Is still one more ban that is due and That's the one that will see the EU Banning Imports of refined Russian crude Including diesel fuel This may be a lot harder for member Countries to get around than the broader Oil ban according to vortexa the European Union and the UK received Almost half of their waterborne Imports Of diesel type fuel from Russia in November that means that Europe will Have only three months in order to find Alternative suppliers of diesel it won't Be an easy task though Much as they learned when trying to buy LNG liquefied natural gas on the open Market there are another of other buyers Out there also bidding for it Europe is Set to face Asia the U.S and Latin America in a battle for diesel barrels Global diesel supplies were already

Playing catch up with demand even prior To Russia's invasion of Ukraine back in February it's also not as if Europe has A lot of diesel reserves ready according To data from s p Diesel and gas oil Stocks in the Amsterdam Rotterdam Antwerp Hub sat at 1.7 million metric Tons 24.9 percent below the five-year average In late November and their lowest since 2008. however Europe does have Additional suppliers in the uh pipeline These include additional volumes to come From Saudi Arabia's jazan and Kuwait's Al-zur refineries however these will Take some time to be fully operational And according to Warren Peterson head of Commodity strategy at ING Bank quote the Bulk of this new Supply will only become Available quite some time after the EU Ban on Russian refined products comes Into Force so what this means is that Consumers in Europe could face higher Prices for diesel type fuels in the new Year it'll be a difficult balancing act For the EU on the one hand the resolve To cut off supplies from Russia while on The other the ire of citizens already Facing sky-high inflation I sure Wouldn't want to be the one having to Make those decisions Okay time for a few of my closing Thoughts on this the West has been stuck Between a rock and a hard place they

Wanted to try and limit Russia's oil Revenues but all the measures they took Sanctions had the perverse effect of Increasing oil prices this meant that Russia would make even more money to Fund its War however after months of Wrangling Western Nations have finally Passed some measures that go to the Heart of Russia's oil exports however Their effectiveness remains to be seen When it comes to the price cap 60 is Still above the cost of fiscal break Even and way above the cost of Production those oil revenues are not Stopping anytime soon and Russia is Finding new buyers around the world it's Growing its shadow Fleet and learning From both Venezuela and Iran that Despite the harshest sanctions possible The market for oil remains as for the Embargo this could have more bite Europe Is the largest importer of Russian oil And finding buyers to fill the Gap will Be a difficult task moreover rerouting That crew to said buyers won't be an Overnight process other pipelines are Running full and the shadow Fleet is Stretched but it won't be easy for Europe either this will become even more Apparent when that diesel embargo comes Into force in February consumers could Face higher prices at the pump and this Could put further pressure on European Leaders then of course there are the

Much broader questions of Chinese demand And OPEC output these will be massive Drivers of oil prices in the coming Months and right now no one knows Exactly how these things will pan out There's also a potential happier Resolution and that's if the war in Ukraine comes to an end however the Likelihood of this happening ultimately Lies with some very opinionated leaders On both sides of the Divide so the only Thing that's certain right now is Uncertainty oil Market volatility will Be the norm And that's it for my video today folks If you enjoyed it you know what to do Hit that like button subscribe button And Bell icon too if you want to get Some of the best promos discounts and Offers in the crypto space then my deals Page is the place exclusive offers only For viewers of this Channel That's Linked to in the description for you Fine people Time's up for this guy which means It's Time to Say Goodbye [Music]