Demand for Russian oil will continue for decades

Assistant Secretary of the Treasury Elizabeth Rosenberg said that the ceiling price for oil from Russia, which the United States and its G7 partners intend to set, will be higher than the cost of production of our raw materials, although it will be “greatly reduced.” Fuel prices from our country will be set at the “market” level, from which the “surcharge” that appeared after the embargo on the purchase of Russian “black gold” will be deducted. How fair will be the “ceiling” of prices and at what level it will be determined by the G7 countries, leading domestic financial experts said.

“There are a few key points we are looking at as to where prices should ultimately be set. This takes into account the marginal cost of production for Russian oil,” Rosenberg said. The “ceiling” is supposed to be set taking into account the historical level of prices in previous periods: this indicator will be determined by the G7 participants. Domestic industry experts are perplexed when and on what grounds the maximum cost of Russian barrels will be set and which of the importing countries will agree to purchase hydrocarbons from our country in such circumstances.

Artem Deev, head of the analytical department at AMarkets:

“The marginal cost of oil, so that the price of its sale at least slightly overtakes the cost of production, cannot be established. Different producing countries have different production and transportation costs. In Saudi Arabia, the cost of a barrel of oil does not reach $ 10, and in Russia, with our cold winter and shipping costs, it turns out to be twice as high. A comfortable level of “black gold” quotations is considered to be about $70-80 per barrel: this is beneficial for producers and affordable for buyers. For Russian oil, the West is preparing prices of $40-50 per barrel. For Russia, this is completely unprofitable. As a result, our country will simply refuse to supply raw materials.

However, it is worth considering that this year Russia has been selling oil to India and China at a $30 discount to Brent. That is, when the North Sea grade cost $100, our country was selling Urals at $70 per barrel.

If a similar mechanism is introduced, Russia will suffer. Oil is easier to transport and store. If our country leaves the European oil market, then the United States, the Arab Emirates and other suppliers will be able to replace our volumes. In Russia, there will be serious consequences: if exports are reduced, wells will have to be mothballed, and it will take time to restore them. Some of the wells will no longer produce the previous volumes. In the case of setting marginal prices, it will be more profitable for Russia to sell raw materials at any price rather than cut production: the industry, which replenishes the budget and has a large share in the country’s GDP, will suffer much less from this.

Alexey Fedorov, TeleTrade analyst:

“It is worth noting that Elisabeth Rosenberg warns that the proposed mechanism for the “ceiling” of Russian oil prices has yet to be formulated in the next few weeks. It can be assumed that we are talking about the “legitimization” of the existing discount on “black gold” from our country, which will serve as the upper limit bar.

If the price falls by a significant amount, oil production in Russia, taking into account the discount, will become unprofitable. Only then will Europe have to raise the upper limit of the price limit in order to maintain the minimum profitability of the Russian oil industry. In this “elegant” way, the G7 is trying to dodge the devastating consequences of a real embargo on the supply of our hydrocarbons to the EU countries.

Moscow’s reaction will be determined by the situation with Ukraine, the state of the world economy and the oil market. Moscow may temporarily stop deliveries of energy resources to unfriendly Western countries. For the world economy, this will be close to disaster.

The unacceptability of mutual damage gives hope for a compromise between Russia and Europe: a complete restructuring of the logistics of energy supplies will take two to three years. Otherwise, the cyclical crisis risks becoming the strongest in the last 100 years. Who will suffer more from it, Russia or the West, will not matter, since the mutual damage will be enormous.”

Natalia Milchakova, Leading Analyst at Freedom Finance Global:

“Probably, the US Department of Energy is trying to take control of the entire world oil market and establish a certain formula by which they can import “black gold”, and, probably, not only Russian. Washington intends to remove the sale of hydrocarbons from the regulation of OPEC+. The introduction of a “price ceiling” is aimed at creating a new energy cartel, but such organizations do not live long. As soon as the cartel begins to dictate its terms, buyers will have a desire for an individual discount or individual terms of delivery. It is possible to control the supply, but attempts to regulate demand are always associated with a directive restriction of the choice of the buyer. If the price ceiling is introduced, at least formally, then American and European importers in the illegal segment of the oil trade will be the first in line for Russian raw materials.

Russia will not lose from the “price ceiling”, it will simply have to forget about economic growth for a couple of years until the logistics of oil supplies to other buyers are adjusted. These will be China and India, which by 2030 will be able to provide 25% of world demand for oil, as well as Turkey, the countries of Southeast Asia and many other buyers of Russian raw materials, which today import energy resources in small volumes, since most of it is intended for export. Russian “black gold” was previously contracted by Europe.

Over the next few years, Russia will have to make serious efforts to establish the logistics of supplies to other countries. We will have to rely on Asian traders and Chinese tankers, and perhaps also create our own insurance or reinsurance companies, similar to Western ones.

But Europe will be trapped. It is unlikely that the US will lift the embargo against Iran and Venezuela without major political concessions from the latter. This means that the import of oil from these states will have to pay much more – not only in kind, but also in the implementation of some geopolitical concessions. Russia will not be cut off from export earnings. There will always be buyers for domestic resources. The amount of natural and raw material resources of the planet is limited. The shortage of hydrocarbons is increasing, and there are fewer and fewer competitors. For example, Norway in the future of three or four years may stop exporting oil. It can be assumed that in the next decade the demand for Russian oil is practically guaranteed.”