It has been more than two months since the EU and G7 issued a decision to set a higher ceiling for Russian oil prices. An evaluation of the feasibility of the decision and its impact on global oil prices can now be made.
The assessment will be based solely on the technical aspects of the decision, rather than the desires and political positions surrounding it, especially since it relates to the most important strategic commodity on countries rely, as an indispensable source of energy.
Technically, this decision was hampered by some market fundamentals, the most significant of which is that of supply and demand – the most significant determinant of prices of goods and services.
Oil markets are experiencing a state of balance, which has kept prices at sound rates so far, including those from Russia despite having to sell at a discount even before the decision on the oil price ceiling went into effect.
Since the issue is related to supply and demand, Russia’s Minister of Energy said that his country will not sell oil to countries adhering to the EU’s price ceiling. This has prompted some EU member states, such as Hungary, to import Russian oil at market prices, possibly with some discounts. According to a recent report by Wall Street Journal, Japan buys Russian oil at a price higher than the cap set by the EU and G7, despite being a G7 member.
Russia’s oil pivot
Several countries have benefited from such discounts, thereby keeping Russian oil prices at normal levels, and allowing for good returns in general. Meanwhile, the free market provides broad marketing opportunities that are not limited to a single geographical area, as has already occurred. Following the boycott, Russian oil shipments shifted from Europe to Asia, particularly to China and India.
The Indian Oil Company (IOC) signed an agreement with Rosneft, Russia’s largest oil producer, to increase its purchases by 11 times, bringing such imports to an all-time high. A portion of India’s refined oil products found their way to European markets, making it difficult to determine commodity prices in the open market.
There is another technical aspect. How can you determine the price of a commodity when you do not own it? The EU countries are mostly non-oil exporting countries, and therefore do not have the tools to control supply levels.
The only group that owns these tools is OPEC+, which cut production as soon as prices fall below their desired rates, as happened earlier this month and at the end of last year when it cut output two times by 3.66 million barrels per day.
Oil basics will always win out
This means there are two opposing approaches: the first seeks to set an oil price cap without strong foundations, while the other emphasizes the importance of using the basics of the technical market in dealing with prices.
The first party lacks the necessary wherewithal to exert pressure to determine oil prices, weakening its position, while the other party, represented by OPEC +, holds the most important cards for market balance and keeping prices at fair levels. And while meeting the needs of the global economy away from geopolitical tensions.
These are some technical reasons why imposing a ceiling cap on oil and other commodities in global markets do not make sense. This is in addition to other aspects related to the rest of the world’s refusal to accept the price ceiling and other approaches associated with the European conflict.
This resulted in creating an exceptional situation in which Western countries are isolated on international issues for the first time in more than 100 years. This necessitates a quick exit from the crisis and its associated problems to limit the consequences on economic conditions that have affected the majority of the world’s countries.
