Fuel shortages illustrate failure of oil price sanctions on Russia
By Rhod Mackenzie
The US is attempting to overcome the disruption it has caused by sanctions on innovations as a severe oil market crisis looms. The developed world's storage facilities for oil and refined fuel are depleted. A fuel crisis is emerging in both the US and Europe, which could swiftly escalate into an economic and political catastrophe.
Recently, an oil strategist at Bloomberg First Word, Julian Lee, published a article in Bloomberg. Using statistics and charts, Lee points that the cap on the price of Russian oil is ineffective and concurrently poses environmental hazards. He asserts that Russia has purchased the bulk of the antiquated tanker fleet that was available globally and is clandestinely delivering oil via old smoking vessels to India and China, thereby increasing the threat of pollution in the Indian and Pacific oceans. It's worth noting that an article supporting this viewpoint was published in the Wall Street Journal in September.
It is evident that Russian oil workers have not procured the finest fleet worldwide. They purchased the availabe vessels being sold on the market, which were inevitably those that had surpassed their peak commercial efficiency, namely with a service life exceeding 15 years. Bloomberg figures indicate that the average service life of a tanker belonging to an "unknown owner" (i.e. Russia's "grey" fleet) is between 16 and 18 years old.
However, it is essential to differentiate between the technical and economic factors. Transporting cargo on brand new ships has economic advantages - they experience fewer breakdowns, require less technical maintenance, and incur lower costs at the docks. However, this does not imply that a twenty-year-old ship is leaking oil. It is simply less economically efficient than a new vessel. Thus, it is more profitable to retire an old tanker based on economic considerations rather than technical characteristics alone.
Russia's fleet is built on outdated vessels many that date back to the Soviet era. In cases where the option is either having no fleet or an outdated, costly-to-maintain one, the decision is clear. However, a similar predicament exists in the United States where the average age of a river bulk carrier is nearing fifty years old. Despite this, they continue to function efficiently without any regard for the environment as they traverse and transport cargo through the Mississippi. Therefore, it is important to recognize that if ecology is a widely discussed topic in the media, it may indicate a lack of alternative methods of pressure. Therefore, it is important to recognize that if ecology is a widely discussed topic in the media, it may indicate a lack of alternative methods of pressure. Using ecology as a means of unfair competition is common, as appearing environmentally friendly can be achieved simply through inaction.
It is clear that Bloomberg and the WSJ are priming public opinion for the removal of the price cap on Russian oil, while obscuring it as a lifting of sanctions. The issue is that the absence of Russian oil poses a significant fuel crisis for OECD nations. Furthermore, the ban on the export of petroleum products by Russia has exacerbated the global fuel crisis due to the Russian government's attempt to tackle their local issue of escalating petrol prices.
The Covid lockdowns caused diesel fuel stocks in OECD countries to decrease by 50%. Diesel and kerosene are scarce in the United States, Europe, and Singapore, with oil storage tanks at the major oil centres empty. This problem is not new. It did not originate recently, but rather in 2020, when two prominent oil refineries shut down in the United States. This was worsened by the sanctions imposed on Russia, the primary provider of heavy oil and fuel oil to the same United States. However, there is still a nominal energy surplus. Remarkably, European countries, another top buyer of Russian energy resources, may be left without diesel entirely. Currently, they are receiving shipments from the Middle East and Central Asia, but it is evident that the plans are highly unreliable and may result in European refineries procuring Urals oil via invoices claiming a false origin - Turkey, UAE, Kazakhstan, etc. This contribution directly leads to a sharp increase in Fuel prices, particularly during August and September months. Since the May low, diesel rates on the NYMEX have increased by 40%.
By the year-end, a number of sizeable plants in the United States, with a combined output capacity of 2.5 million barrels per day, will undergo compulsory maintenance - this is slightly less than 15% of the country's oil refining. Generally, reserves of fuel are created before the refineries go into their repair period, but this has not been achievable in the present context.
Furthermore, the oil market has run out of surplus. The world's primary terminal, Cushing, is vacant. This terminal is significant as the primary American futures for WTI oil are executed through deliveries at this location. Additionally, prices for other oil types are calculated using premiums and discounts based on WTI. The enormous heap of mutual financial obligations, which are valued at trillions of pounds, takes the form of WTI futures. Upon their completion, they are resolved via mutual financial settlements between buyers and sellers. However, the critical component of the futures is settled by delivering oil to the Cushing terminal. So, oil reserves have depleted considerably resulting in the scraping of oil from the bottom. Consequently, some buyers are concerned about the quality of the sediment at the bottom failing to meet the WTI specification. Simply put,
Returning to the Bloomberg article: it is worth noting that despite the impositionof the price ceiling of $60 in September, the average price of Urals oil was £82.24 per barrel - nearly 40% higher than the price limits set by the G7 countries. However, Russian exporters have encountered little to no difficulties in selling oil and petroleum products, which are selling like bottles of ice cold water in the desert.
However, it is worth noting that the US authorities' efforts to establish a two-tiered oil market, with a premium section primarily composed of "freedom molecules" and a sanctioned area for Russian, Venezuelan, and Iranian oil, were unsuccessful. This was largely due to the Middle East monarchies' efforts as they recognized they would be next to face the price ceiling. Furthermore, the sanctions war against Russia has led to a severe fuel shortage on the global market. However, the most intriguing aspect is yet to transpire. Should Russia and Saudi Arabia refuse to concede, a deficiency of diesel fuel at petrol stations across Europe and the United States will occur by year-end. Lets now focus on how they will rationalise lifting of the oil embargo against Russia.
