Is this the only way to curb Russian oil revenues?

The West is seeking to cap the price of Russian oil with the dual purpose of restricting Putin’s oil revenue while reducing the energy bills of the biggest oil consuming countries, including the top oil consumer, the United States. The success of such a plan is far from certain, but there may be a surefire way to restrict Russia’s oil revenues – one that would also inflict pain on the West. We are talking about a recession.

For weeks, the United States and its partners have discussed ideas including banning all services allowing shipments of Russian oil unless buyers pay Russian oil at or below a certain price. There are fears that more restrictions on Russian oil transported by sea could backfire, further raising international crude oil prices and undoing efforts to cut Putin’s energy revenue.

There is a scenario in which Russia will see its oil revenues collapse. But it’s a scenario that no Western policymaker wants, and one that Putin is likely to be happy with. This would be a recession in major economies, including the United States, with significant demand destruction that would lead to lower oil prices, reduce Russia’s income and even free up some production capacity. of unused oil from what is now believed to be a record high. cushion to absorb other shocks.

“A recession or downturn in the economic cycle would change circumstances and make it possible, at least in principle, to replace Russia’s oil exports with more barrels from other suppliers,” wrote Reuters market analyst John Kemp, in his report. column this week.

Markets, including the oil market, already scared this recession is a distinct possibility in the very near future as the Fed and other central banks aggressively raise interest rates in their effort to combat the highest inflation rates in over forty years.

If a possible recession leads to a significant destruction of demand, the tight balances of the market will loosen and the supply of other major producing regions could replace the loss of Russian barrels.

However, some analysts say an inflation-fueled recession may not be devastating for global oil consumption, as it could only dampen expected demand growth, not reduce global demand year on year. the other.

Meanwhile, policymakers in the United States and its allies are scrambling to find a solution to limit the most important contribution to Vladimir Putin’s war chest: oil revenues.

Despite Russia’s weakest exports of crude oil and petroleum products since August 2021, Moscow saw its oil export revenue increase in June, the International Energy Agency (IEA) said in its statement. Oil market report this week.

Russia’s combined crude and products exports in June fell 250,000 bpd from May to 7.4 million bpd, the lowest level since August 2021. But at the same time, Russian oil export revenue rose $700 million in June from May due to higher oil prices, to $20.4 billion, 40% above the EU average last year, according to the IEA.

Current tight market balances and rising oil prices are helping Russia increase its oil revenues despite declining exports. Shipments are expected to fall further when the EU embargo on Russian oil transported by sea comes into force at the end of this year. Without measures to cap the price of Russian oil and without a recession, Putin will continue to reap oil export revenues amid high oil prices.

Related: Europe’s Big and Costly Energy Mistake

Thus, price caps are now at the center of Western efforts to reduce the flow of money to Russia and ease consumer hardship at the pumps.

“A Russian oil price cap is one of our most powerful tools to deal with the pain that Americans and families around the world are feeling at the gas pump and the grocery store right now,” he said. said US Treasury Secretary Janet Yellen. said Thursday at the Group of 20 Finance Ministers and Central Bank Governors meeting in Bali, Indonesia.

“A limit on the price of Russian oil would deprive Putin of the revenue his war machine needs and build on the historic sanctions we already have in place to make it harder for him to fight his war or grow his economy.” , added Secretary Yellen.

“It will also help maintain global oil supplies, helping to put downward pressure on prices for U.S. and global consumers at a time when energy prices are rising,” she noted. .

By Tsvetana Paraskova for Oilprice.com

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