Chris Miller, Nick Kumleben, and Caroline Nowak
Since Russia’s invasion of Ukraine in February 2022, Western governments have imposed a complex set of embargoes and sanctions on Russia’s oil industry. While the US and its allies have long used sanctions as a tool of economic statecraft against oil exporters, the sanctions on Russia target one of the world’s two largest exporters (the other being Saudi Arabia). Moreover, these sanctions come after two decades in which the US has imposed sanctions on other significant oil exporters, including Venezuela and Iran, limiting these countries’ production and export capabilities too.
This report explores how the sanctions on Russia have affected the world oil market. It has three primary findings. First, a larger share of world oil production is under some form of Western sanction today than at any point in a half century. Second, sanctions have caused a significant shift in oil export patterns, rerouting trade flows in an economically inefficient manner and forcing sanctioned countries such as Iran, Russia, and Venezuela to sell crude at below-market prices. Third, the primary beneficiaries of discounted sanctioned oil are China, India, Saudi Arabia, and Turkey, which can buy oil at below-market prices.
We estimate that sanctions on Russian crude oil exports have reduced the import bill of buyers of sanctioned crude by as much as $22 billion over the past year, relative to where prices would have been without discounts to market benchmarks. This calculation excludes discounts on Russian refined product exports, also covered under the price cap, which would likely increase the discount substantially. Sanctions on Russian, Iranian, and Venezuelan crude have created a total discount of as much as $34 billion over the past year relative to traded benchmarks.
Sanctions have splintered the world oil market into “sanctioned” and “non-sanctioned” spheres. This imposes costs on sanctioned countries while offering benefits for countries such as China and India that transact in both sanctioned and non-sanctioned energy markets. Analysis of this partial splintering of the oil market provides new empirical evidence about the impact of current and potential future sanctions. Studying the oil market’s fracturing also provides a glimpse into potential futures for markets for other minerals such as lithium and cobalt that are being reshaped by competition and restrictions imposed by China and the West.
The Origins of the Global Oil Market
The emergence of an efficient, worldwide oil price system is a comparatively recent innovation. Since oil’s emergence as a key energy source in the late 1800s, crude oil and refined products have been sold worldwide. Oil companies have scoured the globe in search of new oil fields. Yet a world oil market with transparent pricing on a spot market only emerged at scale in the 1980s. Before that, oil pricing was fragmented, regionalized, and often opaque.
This globalized oil market—in which prices were transparent and primarily shaped by transport cost and refining differentials—emerged only in the 1980s. Before then, government regulation, industry cartels,and long-term contract structures meant there was no single world oil price. In the US, state-level production quotas and import quotas, which were imposed until 1973, created barriers between US and world prices.
Outside of the United States, most world oil production during the mid-20th century (excluding the Soviet Union) was handled by a small group of Dutch, UK, and US oil firms known as the “seven sisters.” These firms cooperated to manage supply and thus prices.1 They refined much of the oil they produced, so outside of the US there were only limited volumes of crude oil traded on markets.
At the start of 1979, only 3–5 percent of crude oil was traded on the spot market—that is, a market in which multiple buyers and sellers traded oil on demand.2 Because the price of oil was controlled by regulators and the de facto oligopoly of leading oil firms before 1970, oil consumers didn’t need to think much about the price. Price movements were limited, trading between $11 and $21 between 1930 and 1970, using inflation-adjusted 2021 dollars (Figure 1).3 In today’s market, a move of $10 per barrel in a month is hardly exceptional.
No comments:
Post a Comment