{"id":149449,"date":"2022-12-10T17:07:36","date_gmt":"2022-12-10T21:07:36","guid":{"rendered":"http:\/\/stateofthenation.co\/?p=149449"},"modified":"2022-12-10T17:08:19","modified_gmt":"2022-12-10T21:08:19","slug":"eus-oil-price-cap-creates-a-price-cap-on-stupidity","status":"publish","type":"post","link":"https:\/\/stateofthenation.co\/?p=149449","title":{"rendered":"

EU\u2019s Oil Price Cap Creates a Price Cap\u2026 on Stupidity<\/b><\/h2>"},"content":{"rendered":"

\"\"

MOSCOW, RUSSIA \u0096 DECEMBER 1, 2021: Russia’s Foreign Ministry Spokesperson Maria Zakharova gives a weekly press briefing. Russian Foreign Ministry\/TASS<\/p><\/div><\/p>\n

Tom Luongo
\nGOLD GOATS ‘N GUNS<\/p>\n

The EU and the US went forward with their long-debated, long-telegraphed move to put a price cap on Russian oil at $60 per barrel.<\/p>\n

By believing they can pressure suppliers into not hauling Russian oil lest they run afoul of the sanctions that support the price cap, they believe they can take only Russian oil off the market for the long run.<\/p>\n

Because of the way oil is actually traded in the real world, versus the way it trades in Janet Yellen\u2019s head, this policy is actually much harder to implement than it actually looks. You don\u2019t buy oil at the crude oil counter at Target or Wal-Mart.<\/p>\n

There isn\u2019t a price tag you can look at and say yes or no too. As Tsvetana Paraskova at\u00a0Oilprice points out<\/a>, crude contracts are written based on a discount or premium to a benchmark price at a particular moment in time.<\/p>\n

\u201cPhysical traders rarely trade on a fixed price,\u201d John Driscoll, chief strategist at JTD Energy Services Pte Ltd, told Bloomberg.<\/p>\n

\u201cIt\u2019s a much more complex space where they trade on formulas and spot differentials to a benchmark crude for the trading of actual cargoes as well as for hedging that follows,\u201d said Driscoll, who has more than 30 years of trading oil in Singapore.<\/p><\/blockquote>\n

To complicate things further, the EU wants to remain flexible to change the cap at its discretion.<\/p>\n

\u201cThe price cap is not set in stone \u2013 it \u201cis fixed for now but adjustable over time,\u201d the EU\u00a0said<\/a>\u00a0last week.<\/p><\/blockquote>\n

If this sounds like a recipe for complete disaster, it is.<\/p>\n

No matter what happens here, the quantity of oil to be produced under this cap, even if it isn\u2019t successful, will go down. Period. See chart below. If you disagree with this then you might just qualify to replace Yellen as Treasury Secretary of the US.<\/p>\n

\"\"<\/figure>\n

That said, Janet Yellen may be stupid, but she\u2019s not that stupid. She knows what this price cap she\u2019s championed will do. So, as always, with these people the question you shouldn\u2019t be asking isn\u2019t, \u201cWill this work?\u201d or \u201cHow will Russia respond?\u201d but rather, \u201cIs this the point of the exercise?\u201d<\/p>\n

I was contacted by Sputnik News for my comments on this\u00a0(article here<\/a>) and this is the tact I took in answering their questions.<\/p>\n

If everyone involved knows that price floors and price ceilings always and without fail create production shortages, then why did they do this when the world clearly need more oil?<\/p>\n

Because this is a feature of the policy, not a bug.<\/p>\n

By doing this, like every other intervention into oil delivery since the start of the war in Ukraine, the goal was to take Russia\u2019s supply offline and hope that other producers would see the opportunity to take market share from the evil Russians while simultaneously trying to push capital investment into competing energy technologies \u2014 like nuclear, hydrogen and unicorn farts.<\/p>\n

It hasn\u2019t worked. Russia happily sells their oil at a major discount to Brent Crude, but will it remain the $30 China and India have been paying below Brent? Only if Brent stays at $90+ per barrel. With Brent now trading in the high $70\u2019s those discounts will attenuate.<\/p>\n

And with Vanguard following Blackrock\u2019s lead in ditching ESG as a policy driver for investment flows, we\u2019ve likely reached the limit of this stupidity, because despite the protestations of commies the world over, capital flows to where it is treated best.<\/p>\n

That flow is now distinctly around Europe rather than the intended target, Russia.<\/p>\n

There are many goals of this price cap, some stated, some implied, my comments are\u00a0in italics<\/strong><\/em>\u00a0afterwards.<\/p>\n

    \n
  1. Limit Russia\u2019s oil revenue enough to bleed out their budget.\u00a0Not likely as the discount to Brent will rise and fall with futures. Russia\u2019s cost of production is the lowest in the world with the highest spare capacity to bring online or take offline.<\/strong><\/em><\/li>\n
  2. Spur other OPEC+ members to pump beyond their quotas and break the cartel.\u00a0Again, not likely, as the only ones who have spare capacity are also under heavy sanctions, Venezuela, Iran, etc. To crib from Planet of the Apes, \u201cOPEC together strong.\u201d<\/strong><\/em><\/li>\n
  3. Make the Saudis an offer they can\u2019t refuse, to lead OPEC without Russia.\u00a0This has fully failed as\u00a0KSA has just signed a Strategic Partnership with China\u00a0<\/a>during Xi\u2019s first visit to a foreign power since COVID faster than you can say, \u201cmulti-polar world.\u201d<\/strong><\/em><\/li>\n
  4. Bring the price of oil down to allow \u201cBiden\u201d to refill the SPR at a big discount.\u00a0Only so long as they can manipulate futures prices down and keep demand off the market.<\/strong><\/em><\/li>\n
  5. Cause further chaos in oil shipping to freeze investment capital in an industry trillions behind the curve in exploration because of ESG and \u201cUS\/EU policy\u201d\u00a0This is what the real goal is. It\u2019s why I think Liz Truss was taken out as UK Prime Minister and why Germany happily went along with the Nordstream bombing and closing off the Druzbha Pipeline.<\/strong><\/em><\/li>\n
  6. Force Putin to sell Europe oil below market prices to fund the upcoming war effort against Russia, now clearly on the table for 2023.\u00a0They want you to believe oil\u00a0flows to Europe have already cratered<\/a>, while bookings (as Sputnik pointed out) for Sovcomflot\u2019s tanker fleet are up. The only numbers that matter are Russia\u2019s exports, not whether oil flows through western tracking data.<\/strong><\/em><\/li>\n<\/ol>\n

    I\u2019ve maintained for years that Europe feels they have some kind of\u00a0monopsony<\/em>\u00a0(single buyer) power over Russian energy. And all they have to do is hold their nose and refuse to buy Russia\u2019s products and this will force them to sell to them at whatever price they demand.<\/p>\n

    What I\u2019m still trying to figure out, however, is how much better a deal do they want than the one they had pre-Ukraine War, a war they did nothing substantial to stop?<\/p>\n

    To believe that the EU only pursued this antagonistic relationship with Russia because it is a colony of the US Empire is simply delusional at this point. At no point did Europe try to make peace with Russia financially, economically or diplomatically.<\/p>\n

    Former German Chancellor Angela Merkel reiterated recently\u00a0in an interview with\u00a0Die Zeit<\/em>\u00a0<\/a>that the Minsk Accords were designed as a delaying tactic to arm Ukraine for the future war against Russia.<\/p>\n

    This admission blows up that entire coping narrative of ideological leftists who hate the US (and all that it supposedly still stands for, i.e. capitalism) so much they can\u2019t accept the reality of their insanity.<\/p>\n

    Europe chose this path. They chose freely to freeze Russia\u2019s foreign exchange reserves, decline to buy their oil and gas, and sanction Russia to the point of destabilizing not just their own food and energy security, but also everyone else\u2019s in the process.<\/p>\n

    Davos<\/em>\u00a0hates the freedom that oil and gas represent. Their strategy is to starve the entire oil complex of needed capital and hope it collapses. What it\u2019s doing is accelerating the creation of parallel markets for shipping, insurance, payment clearance and investment banking for base commodities in markets outside of their control.<\/p>\n

    They\u2019ve interfered in elections\/governments the world over in key pockets of resistance \u2014 the US, Brazil, now Peru, the UK, Pakistan, Kazakhstan, \u2014 to disrupt any further integration of Asia.<\/p>\n

    Most of these have failed, but have succeeded in making the world less safe, less predictable.<\/p>\n

    The price cap is a stupid policy implemented by people with a clear animus against humanity itself that they would drive the world to the brink of nuclear war. It\u2019s nothing more than the same scorched earth policy that\u2019s been on display for years now.<\/p>\n

    If we can\u2019t rule the world, we will burn it down. All it\u2019s really doing is accelerating the split between East and West. Russia is done with Europe. They have turned East and will wait for Europeans to come to their senses and find common ground. Both they and the Chinese realize now there is no return to normalcy without the West collapsing in a fit of rage.<\/p>\n

    All over a few miserable dollars per barrel.<\/p>\n

    As always, my full replies to Sputnik are below the line.<\/p>\n

    \n

    As the price cap on Russian oil comes into force, how will the global market react? What long-term consequences do you expect?<\/h2>\n

    The price cap is simply moronic from a price perspective.\u00a0 Any 1st<\/sup>\u00a0semester student of economics understands that price caps\/floors create shortages.\u00a0 So, we shouldn\u2019t look at price directly.\u00a0 Price is a consequence of supply and demand, in this case a deliberate attempt to create a shortage by introducing unnecessary friction all throughout the oil supply chain to create a global shortage of energy.<\/p>\n

    Oil prices will rise in the short term because of this and investment in new oil sources will now accelerate but outside of the West who have turned completely hostile to new sources of oil entering the market.<\/p>\n

    The price cap was conceived with the objective of punishing Russia over its special military operation in Ukraine \u2013 what are traps and pitfalls of energy supply politicization?<\/h2>\n

    As always with moves like this, there is the story we\u2019re told and then there is the real story. This cap will not deter Russia in any significant way from exporting oil. \u00a0What will happen is the map of oil delivery worldwide will change.\u00a0 Energy that flowed west will now flow east and south.\u00a0 The ESPO pipeline will see full utilization as demand from SE Asia rises.<\/p>\n

    Projects that previous to the divorce between Russia and the EU were uneconomic are now economic as a price floor has now been put on the market.\u00a0 That\u2019s what is so funny about this \u2018price cap\u2019 on Russian oil, it\u2019s actually a \u2018price floor,\u2019 ensuring that Russia, the country with the lowest cost per barrel of any major producer, has guaranteed minimum income going forward.<\/p>\n

    I believe the goal of Janet Yellen, the person most responsible for this idiocy, is to both raise the price of oil to accelerate investment into renewables but limit the amount of money Russia gets, starving them, and other oil producers of capital.<\/p>\n

    In short, it\u2019s nothing new.\u00a0 These are the same people who put sanctions on Russia to make the ruble weak while the price of oil rose.<\/p>\n

    How can the move backfire on G7 countries and the EU in particular?<\/h2>\n

    It already has.\u00a0 As I said, this is just an extension of the same policy that\u2019s always been in place.\u00a0 What will (and is) happening is that the investment they are trying to retard into replacement oil and gas reserves will now occur outside of the western financial system and western currencies, i.e. the US dollar and the euro.<\/p>\n

    Capital flows both to where it\u2019s needed and where it\u2019s treated best.\u00a0 What\u2019s happening in the West is one big policy to freeze capital where it is currently trapped and beat it with the ESG stick.\u00a0 I could write a book here about why this is dumb and counterproductive, but I\u2019ll just state that, in short, it won\u2019t work.<\/p>\n

    This price cap is the beginning of the major shift towards the East becoming the center for global capital investment.<\/p>\n

    The price cap had sown discord within the EU and resulted in months of bickering \u2013 do you expect further split within the EU members now, as the measure came into force?<\/h2>\n

    Yes.\u00a0 But the European Commission isn\u2019t listening and is continuing to play hardball with every EU member state and Russia on every issue.\u00a0 At the same time, they also support NATO expansion, which is tantamount to an open war declaration against Russia. Now it\u2019s War Crimes Tribunals against Russia for a war it won\u2019t fight or can even win.<\/p>\n

    The internal politics of gas delivery within the EU is now facing a shift with Italy\u2019s Giorgia Meloni clearly angling to replace Germany as the port of entry for most piped gas into Europe.\u00a0 France and Germany are hopping mad about this.<\/p>\n

    This energy crisis in the EU is designed to break the spirit of Europe\u2019s people to accept full totalitarian\/centralized control over everything.\u00a0 The outward face of the EU is one of inevitability, while masking the deep divisions that are tearing it apart at the seams.<\/p>\n

    What kind of problems will the EU face given that Russia\u2019s Deputy Prime Minister Alexander Novak specified earlier that if the cap came into effect, Russia would either redirect its crude supply or slash production?<\/h2>\n

    China and India are already filling the gaps.\u00a0 Russian oil will be blended in the Bahamas or other storage ports and then sent back to EU refineries.\u00a0 It\u2019s all shadow play and theater. The main goal, as I said, was to make the oil markets less efficient, raising costs while starving it of capital at the same time.<\/p>\n

    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.\u00a0 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.<\/p>\n

    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\u2026. If the EU will suffer, then so will the whole world.\u00a0 It\u2019s the ultimate game of brinksmanship.\u00a0 And they are the ones driving this bus, along with certain old money connected players in the US, while simultaneously using those players in the US, like Yellen, as a smokescreen for their preferred outcomes.<\/p>\n

    The clear story now is that the EU is blaming the US for all of its ills, exactly like I said they would do over a year ago.\u00a0 EU Commission President Ursula Von der Leyen just did this, complaining about the US subsidies for green energy projects. French President Emmanuel Macron complained that the US was making too much money off selling the EU natural gas.<\/p>\n

    Are they serious? Putin offered them a way out of this but, as always, the Eurocrats want their cake and eat it too\u2026 they want to punish Putin and get their energy at subsidized rates.\u00a0 Seriously, why does anyone take these apparatchiks seriously?<\/p>\n

    Everything they do is the equivalent of pointing a gun to their head, pulling the trigger but only grazing the skull and then blaming everyone else for letting them do it and telling the Americans to go kick Russia out of Ukraine.<\/p>\n

    It\u2019s pathological.<\/p>\n

    What will be the market\u2019s reaction in the event of Russia curbing its production?<\/h2>\n

    Clearly oil prices will rise.\u00a0 China and India will still buy Russian oil, refine it and sell it back to the EU at value-added prices.\u00a0 The money Europe used to make refining cheap Russian oil will now go to China and India, who paid for it at a discount, using their own currencies or rubles, and Europeans get stuck with the bill.<\/p>\n

    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\u2019s war on the periodic table of elements.<\/p>\n

    ___
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