Playing tough on Russian oil supplies will come at a steep cost for Europe's economies. Image Credit: Reuters

Over the past week, the world saw three major developments in the oil industry directly linked to the interests of three powers. Each wanted to push their own agenda and which is heralding successive changes in global relations and alliances.

The developments came in the form of a three-act play where the comical outcomes were mixed with outright tragedy, as is the case with political plays these days. The first move was the decisive decision taken by OPEC+ to raise production by 432,000 barrels per day, starting May, which works out to an increase of 32,000 barrels from the previous agreement that ends this month.

This decision mirrors the interests of oil-producing countries and takes into account market fundamentals, which clearly suggest now is not the time to go in for broad production increases. This is despite the constant pressures being inflicted on the group by external players.

The second development resulted from the first one, where the US decided to pump 180 million barrels of its strategic reserves for six month, which constitutes 30 per cent of its stockpile. The US move aimed to reduce fuel prices, which has sparked a considerable rise in inflation levels, even reaching 10 per cent in some EU countries. This has impacted quite heavily on consumers, and set off widespread grumbling over the high cost of living.

Limited impact

It is quite weird that the US went ahead with another release from its oil stocks despite the failure of an earlier attempt last November, by which it pumped out 60 million barrels of oil reserves. So, it would be highly likely that the results would be the same, although Washington is currently pressuring other countries to release an additional 50 million barrels. In this case, some changes may happen but will have a limited play.

The OPEC+ group may take action if the US move does have an impact on prices, as production levels are reviewed monthly by the organization. On the other hand, six months from now - specifically when the winter season sets in - a large portion of the US strategic oil reserves will have been consumed, which must be refilled, meaning an increase in demand coupled with another rise in prices. The US will try to increase its oil production to compensate for the lost reserves, but the question here is to what extent and in what proportion will that hike be.

Rouble flow

As for the third development, Russia has decided to sell gas and oil to Europe in rubles instead of the US dollar and euro, in a historic decision that paves the way for a major overhaul in global financial transactions. The EU countries have two options, the best of which is unpleasant, either dealing in rubles, through buying it from the Central Bank of Russia, which means the failure of the boycott and the various sanctions.

The second option is suspending the flow of Russian gas to Europe, which means hundreds of factories and many power stations ceasing operations, in addition to causing a sharp rise in prices that European economies may not bear. They stand to suffer from a severe economic crisis and a deterioration to their productive sectors, causing further rise in prices, unemployment rates and serious social repercussions.

Moreover, the German Finance Minister Christian Lindner said, “Germany cannot do without Russian gas supplies at the moment, and the sanctions imposed on Moscow in this sector will harm the EU more than Russia.”

In Asia, matters are slightly different. Japan has announced that it will not withdraw from the Sakhalin 2 project, through which it receives its supplies from Russian gas, along with South Korea, saying that such a withdrawal would jeopardize its energy security, which means there is ample Asian rationalism in dealing with the crisis.

Europe is in a state of confusion and is in dire need for the wisdom of an Angela Merkel and the tact and diplomacy of Jacques Chirac.