The Coming Oil Crisis
At just the time that the Ukraine War began, the leaders of the West, principally the European Union, Great Britain, and the United States, decided that the laws of economics no longer applied. These countries, which are significant oil importers, agreed that they, and not the oil producers, would set the oil price.
It's a remarkable turn of events. In the history of finance, never has a buyer of goods tried to set the price. Yes, a buyer may limit what they're willing to spend. But that comes with the understanding that if their price is too low, they will not be able to buy that item. As consumers, we often do that kind of exercise. We set a maximum price limit, a budget price if you will, but if we are too far from the market, we know we won't purchase it.
Who sets the price is fundamental. A child learns every time they walk into a toy store. Some toys your parents will buy for you, but others are too expensive.
It was a lesson that the G-20 Economic Leadership missed. The leadership of the G-20 includes significant oil importers like the United States, Japan, and most of Europe. The G-20 declared that the maximum price they would pay for a barrel of Russian oil is $60. That Price Cap is $22 per barrel below the current market for equivalent Brent North Sea Oil.
In other words, the Collective West, consisting primarily of oil-importing countries, believes they can set Russia's oil prices to 27% less this year than last.
How would you react if you were the Russia Oil company?
You're right; Russia has begun cutting back on its exports to the G-20. Initially cutting production by 2 million barrels last year, and now scheduling another half million barrel cut in daily production beginning in March.
If you've ever run a business with one major client, you know Russia's difficult position. If they could, I'm sure that Russia would cut off exports to the entire Collective West. But they don't have enough demand from their new customers, China, India, Brazil, and South Africa, the BRICS Nations, to replace the Collective West. But wait, that's coming. Those countries represent most of the World's Population, and increasing demand is just a matter of time. And then we'll likely see Russia replace its existing oil customers with these new BRICS customers.
However, Russia will need to be cautious until that time arrives, keeping the existing Western Customers and taking a 27% haircut on their revenue. While gradually courting these new customers.
In the meantime, the Collective West looks to continue on their insane strategy of self-strangulation. Cutting off Russia from supplying just the oil we need to operate a prosperous economy.
Currently, the Price Cap applies only to oil transported by ship. But now, with the Nordstream Pipeline gone, some in Brussels would like to see the Cap on all Russian oil. And US Treasury Secretary Janet Yellen is right there. In November of last year, Secretary Yellen made it illegal for any American to participate in the transportation of Russian oil. This enforced boycott will prove particularly problematic for international oil companies Exxon and Chevron, which have extensive operations in Europe. These two companies will likely have to audit the oil they transport to comply with the new regulation.
That is consistent with the Biden Administration's effort to make the free and open oil flow as tricky as possible. And it all points to why an oil crisis is approaching.
So how is America's supply of oil?
World Oil states US-proven oil reserves have declined about 19% since the Pandemic. While President Biden has drawn down nearly half of our Strategic Petroleum Reserve since his inauguration, the very resource that was intended for tough times like we're about to face.
Let's review some of President Biden's actions since assuming office. He canceled the Keystone XL Pipeline, drew down the Strategic Petroleum Reserve (SPR) to a level that makes these reserves unavailable, and canceled new exploration on Federal Lands on his first day in office. He cancels all Russian imports of oil, representing about 10% of our oil supply. Add them all, no matter how you feel about some of these decisions individually. He has put America in a dangerous position, with the real threat of reduced supply and higher prices.
The President is in an altercation with our chief oil supplier Saudi Arabia. A recent cutback in production by the Saudis lead to a stinging rebuke by the President. The President felt that the Saudis should supply as much oil as possible to lower the current price of oil and reduce inflation. The Saudis responded by opening their oil sales to any currency, not just the Dollar. And as we've discussed, this poses a real threat to the US Dollar's Reserve status.
The United States, like Europe and the rest of the collective West, have built its economies on cheap imported oil. And we rely on the good graces of the oil-producing countries to supply that oil. These countries are halfway around the world and often have very different goals and values.
For more than half a century, the collective West has dictated the terms of oil sales. But it is foolishness to believe that we, as the chief oil buyers, can set oil prices. That is and always has been the function of the seller, as it will be shortly in the oil market.
From Moscow to Riyadh, that message is coming that the oil producers will set the price, and those prices should arrive in America for summer drive-time.