Before 2022 came to a close, Russian President Vladimir Putin signed a decree that effectively barred the export of oil and petroleum products to countries and companies that cooperate with the G7's price cap on Russian crude. The price cap scheme, enacted after months of internal debate between the United States, the European Union and partner nations, aims to accomplish two objectives at once: reduce the Kremlin's revenues, thereby complicating its financing of the war in Ukraine, and keep adequate supply on the market to ensure prices remain steady for the consumer.
Buyers wishing to use Western tanker insurance to transport Russian oil will have to attest that the cargo is priced at or below the $60 a barrel limit. Coming on top of the EU's Dec. 5 ban on the purchase of Russian sea-born oil, the cap will (in theory) complicate Moscow's ability to transport its crude to buyers around the world.
The Russians are unsurprisingly angry at the intrusion in what is their most valuable money-making enterprise. Putin himself has lambasted the price cap scheme as "stupid," while Alexander Novak, the deputy prime minister, stated that Russia could respond by cutting oil production by up to 700,000 barrels a day. Such an action would tighten supply, and it's highly unlikely the U.S. would be able to rely on oil producers in the Gulf to offset the shortfall.
This is a threat Washington and its European allies need to take seriously, if only so they aren't caught unprepared. Oil, after all, is a global commodity with a global price. The fact that Europe is drastically reducing its purchase of Russian oil (the U.S. stopped importing Russian oil in March) doesn't mean they will be insulated from higher prices. The U.S., for instance, has cut imports of Saudi crude by 74 percent over the last 20 years, yet the Biden administration was still highly upset when OPEC+ slashed oil output by 2 million barrels a day in October. Just because you choose to diversify your energy suppliers doesn't mean you won't be impacted by the market.
Presumably, Russia could retaliate to the G7 price cap by slashing production levels in an attempt to boost prices at a time when the West is still dealing with naggingly high inflation rates. Putin's two-page decree serves as the legalistic foundation for a future production cut. Such a policy would be right out of the Putin playbook; it was only four short months ago when he stopped delivering natural gas supplies to Europe through the Nord Stream pipeline, a ploy to penalize European governments for sanctioning the Russian economy and supporting Ukraine's defense.
That move, however, backfired royally on the Russian leader. Putin, who was frequently lauded in the past as a strategic genius who calmly weighed all of his options and could see eight moves ahead of him, has exposed himself to be a gambler with a limited hand. And he is apparently incapable of conducting an accurate cost-benefit analysis. The Russian dictator assumed cutting off gas to Europe would, over time, bring European leaders back to their senses or at the very least inject division in what has been a surprisingly unified European Union.
All it really did, however, was burn bridges with the West and push Europe to search the world for alternative suppliers. With a single stroke of the pen, Putin managed to jeopardize Russian access to its biggest and most profitable customer. Russia's entire natural gas infrastructure, designed to service Europe over the long-term, will now have to be rebuilt to service alternate markets in Asia, which will cost time, money, and Western-sourced technology that is in short supply. According to the International Energy Agency, it will take Russia at least a decade to bring its Asia-bound gas exports to comparable levels in Europe. In the meantime, Putin is increasingly dependent on China as a main buyer of its gas, a country that is not only keen to exploit this dependency for better terms but one extremely wary of relying too much on a single nation for energy resources.
Oil, of course, is different than natural gas. With crude, the Russians don't have to worry about finding investors to build new, expensive pipelines. Oil can be loaded onto ships with relative ease and transporting the commodity doesn't require the kind of special, liquification technology that gas does. To date, Moscow has had considerable success diverting Europe-bound cargoes to the east; India, which barely imported any Russian crude before the war in Ukraine, is now importing close to 1 million barrels a day. Russian oil exports to China have increased by more than 9 percent year-over-year, if Rosneft CEO Igor Sechin's calculations are accurate.
But all of these barrels are being sold at a significant discount to the global benchmark, costing the Kremlin $4 billion a month in lost revenue. Russia needs to sell more just to keep pace with its previous returns. Given the turbulence of the oil market, including unresolved questions about the extent of China's emergence from its zero-COVID policy, the Kremlin may have a tough time doing so.
With his latest order, Putin wants you to believe he can turn off the oil taps like he did with natural gas. The question, as ever, is whether he will run the risk of throwing a hand grenade into the global oil market at a time when Moscow needs all of the oil receipts it can get.
Daniel R. DePetris is a fellow at Defense Priorities and a syndicated foreign affairs columnist at the Chicago Tribune.
The views expressed in this article are the writer's own.
Uncommon Knowledge
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Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
