I separated this into a post of its own. Apologies to Redshift for the wall of text, but this one
might be somewhat educational, haha.
I have heard that the price oil that Russia can sell under sanction is not $60/Barrel but $15 under market price. It makes a big difference when oil prices are down. I didn't spend time to check because I assumed it's true.
Your assumption is very wrong again. Here are basic facts and math. Under sanctions, Russia can sell its oil “legit” for $60 or less per barrel, using the “legit” fleet and insurance; in other words, using market transport rates (this is very important as we will see later in this post). There is no discount in this case. Why would there be any if the sale follows all the “laws” and anyone can buy it at the market price? Note, that I put it “legit” and “laws” in quotes because there are no such actual laws or legitimacy to the whole scheme, but simply rules imposed by those who provide the means of freight and/or their insurance. Otherwise, nobody cares about any of it, including members of the EU itself.
Now let’s assume the market price is $65 per barrel of oil. In your example, the Russians must be complete idiots to provide a discount higher than $5 per barrel because they can simply use the “legit” transport and sell it for $60 to the next guy in line. In other words, they will not provide a discount of $15 unless the price hits the mark of over $75 per barrel.
Now lets add some complexity and say that the market price of oil is $75, but… I don’t recall the exact numbers anymore (there do exist approximate calculations of these numbers though), but let’s just say, for the sake of this discussion, it costs Russia additional $5 per barrel to ship their oil in their “shady” ways. This, logically, would take us into the realm where the price of oil is over $80 per barrel for a $15 discount to make any sense. This could not be any more straight forward, I don’t think.
Let’s add another layer of complexity. Consider that the market price of oil is sitting at $80 per barrel and it costs Russia additional $5 per barrel to ship their oil because they cannot use the “legit” ways to do so - that is, the maximum they can fetch is $75. Russia, obviously, wants to maximize profits and get more than the imposed ceiling of $60 for every barrel of oil they sell. Here we have China, India, Turkey, and dozens of other countries thst want to buy this very oil at a discounted price. Something to keep in mind here is that Russian oil is still being pumped to Europe via Druzhba pipeline and it is being sold at market prices (not exactly, but to make things simpler we can assume this is the case) because there is no “ceiling” set for oil delivered via pipelines.
So… Let’s say China says “I’ll buy your oil at a discount of $15 per barrel”. Here, Russia throws up its head and laughs because it can sell it to Romania, for example, at $60 per and only having to haul it over the Black Sea. $5 in extra shipping costs plus $15 discount puts it right back to the “legal” $60 per barrel. India, having more common sense, says “I will buy your oil at $14 per barrel discount”. Turkey, realizing it may miss out on a great deal, says “$13 discount is good enough for me”. China gets back to its senses and says “Hey, I am good with a 8-dollar discount and I will take all you have to move this month”. India says “It makes a lot of sense for me to get this Russian oil at $75 per barrel - that is, discount of $5 per barrel, which is the additional shipping costs Russia now incurs - than paying the market price of $80 to someone else”. All of a sudden, Greece chimes in and says “You know what, Russia, I will take a buck a barrel and let you unload whatever you want to whoever you want in my territorial waters and be done with it”. Russia takes the highest bidder and moves on to the next one.
While the above description of the situation is oversimplified for the sake of easy-to-digest example, this is all very trivial stuff. The “ceiling” is designed so that Russia will never sell their oil for less than that ceiling whenever the market price is above it. Which is why some suggested that the ceiling price should not be fixed, but rather floating and tied to the market price of oil. That makes little sense as well. But first, let’s look at it in another way.
So let’s say my business is transporting oil and I own ten tankers. Two of these tankers are usually reserved for transporting oil from Russia. All of a sudden, with the sanctions in place, I can no longer ship Russian oil when market price is above $60 per barrel. There are many other guys like me who have parts of their fleet dedicated to the same customer. Some guys had 80%+ of their fleet dedicated to the transport of Russian oil. Some of those guys said, once the sanctions were enacted, they would now dedicate their entire fleet to transport Russian oil for higher fees per barrel and sanctions be damned. It clearly made a lot of economic sense to them. Others, having most of their fleet tied up to other customers not directly affected by the sanctions, ended up with having some excess capacity that no one wants at prices that make economic sense to these service providers. I, previously having 8 tankers dedicated to the US, Saudis, UAE, etc, and two to Russia, am now in a bind. I could find the use for one of my tankers, thanks to the guy who said that he will now exclusively haul oil from Russia. My other tanker is sitting idle, however. What am I to do? Well, Russia is now building its “shadow fleet” and is offering some great coin for the idle tanker I have. I can’t just have it sitting idle because it is very expensive and I am incurring substantial losses. Moreover, Russia is offering quite a bit more than I can get for my oldest ship in almost any other circumstances. Of course, I sell that ship to Russia. Everyone else does the same until the new market equilibrium is achieved in the oil transport world.
Funny enough, now, once the price of oil drops to where it makes more sense for Russia to employ the “legit” fleet, everyone else is experiencing considerably higher delivery fees because Russia has a substantial (relatively speaking) control of tanker availability for crude transport. In other words, they now own what became the excess capacity at higher oil prices prior.
To come back to the original proposition that Russia provides a 15-dollar discount… it is not the reality. For a relatively brief point in time it was very much so. I saw discounts larger than $15 being reported. Why was this the case? The answer is simple: Russia did not have the capacity to transport the oil they are producing to avoid the artificially imposed price caps. Thus, everyone took advantage for as long as they could. As the shadow fleet grew in size, the discount gradually decreased to often being nil.
Why does this price cap make no sense? Well, in addition to what I described above, we now have a whole bunch of tankers sailing the seas, tankers that have subpar safety standards (if sny), inspections, etc. We saw limited consequences of the practice in the Black Sea. If it happens somewhere else, good luck having Russia pay for remediation. There is a reason we have a mandatory insurance. On top of that, as I also discussed, Russia now clearly has some pull on the global crude transport rates and this is more permanent because no one in their right mind would invest into new fleet (or buy their old stock back) in the time of uncertainty as long as the sanctions are in place.
Tying the cap to the market price will also achieve very little at this point. Price elasticity is not there (who would have thought?!).
It should also be noted that my brief discussion above is
very simplified. There are many other factors that come into play. For instance, and importantly, people usually say “oil” and assume that this is all there is to it. That could not be further from the truth. One “oil” is very different from another. There is light and heavy, sweet and sour, etc. Those aren’t just words. A lot of refining infrastructure was built to refine a specific type of oil. Some refineries in the US, for example, were built to process heavy Canadian oil and about the only substitute they can get is the oil from Venezuela. Mexico is a lot closer, but without substantial investments (usually worth billions of dollars), Mexican oil has no value for those refineries. The opposite is, of course, true as well. I cannot make educated enough comments on the refineries most of anywhere else outside of North America, but the rule is surely universal. In other words, some places can do very little but to buy oil they were built to process.
I have a lot more to say on the subject, but I trust this should suffice for now. Assumptions should always be based on knowledge and reality. Otherwise… As I was taught, the word itself provides for trouble “ass u me”. In other words, it has potential to make an ass of both, you and me.
