By Olga Samofalova
The well-coordinated actions of Saudi Arabia and Russia to limit the supply of oil have already begun to bear fruit. On the one hand, this has had unpleasant effect on Western countries in the form of rising petrol prices and the risk of recession. On the other hand, the price of Russian Urals grade crude oil is already increasing, which promises to return Russia's oil and gas revenues to a level of growth.
The restrictions of Russia and Saudi Arabia on the oil market have begun to have a negative impact on the US and EU markets.
According to the American Automobile Association, retail gasoline prices in the US are rising again, threatening to exacerbate the inflationary problem that the Fed is stubbornly fighting by raising rates. A gallon of gasoline is trading at $3.89 on average, the highest level since October 2022.
The rise in gasoline prices is due to the rise in the price of oil in the world market. Both benchmark Brent crude and West Texas Intermediate crude are trading above $80 a barrel. It was possible to raise the cost due to the fact that Saudi Arabia and Russia continue to reduce supply in the market. On August 1, new restrictions began to operate, which both countries took over. Saudi Arabia cuts production by 1 million barrels per day for a month, and Russia cuts oil exports by 500,000 barrels per day.
In the case of Russia, a reduction in exports does not necessarily mean a reduction in its production. Various options are possible here, including the redirection of part of the oil for internal processing. The additional volumes of oil products, in turn, can go both to the domestic market and for export. In this regard, unofficial information that the Belarusians want to stop deliveries of their oil products to Russia, the volumes of which were not large anyway, should not seriously affect the domestic market.
The other day at the OPEC + ministerial meeting, Saudi Arabia announced that it would voluntarily extend the production cut by 1 million barrels per day until September. And Russia will continue to reduce oil exports in September, but not by 500 thousand barrels per day, as in August, but by 300 thousand barrels per day.
The US is an oil exporter, so it may seem that Washington benefits from more expensive oil. However, it is beneficial to the country's oil industry, which is represented by private companies, but not to the state as a whole and its "green" president. Joe Biden openly criticized Saudi Arabia and he demanded that it should not raise oil prices, but it did not listen to him.
For the US, expensive gasoline is a problem because most Americans travel by car, and for them, gasoline expenses are daily, along with food and rent. A one-cent increase in the price of one gallon of gasoline in the United States takes away about $1.15 billion in purchasing power on an annualized basis, Brett Ryan, senior economist at Deutsche Bank, calculated for Bloomberg. This means that consumers start spending more money on gasoline and have less money left for other goods and services.
In addition, motorists in the United States are very active voters, whose opinion is extremely important in elections. A little more than a year remains before the election of the American president. Last summer, Joe Biden had to sell off a huge chunk of the nation's strategic oil reserves in order to keep gas station prices down and keep the electorate loyal. And now this question - how to keep the price of gasoline at gas stations - confronts him with renewed vigor.
Finally, the rise in price of gasoline leads to an increase in prices everywhere for all goods and services. And this creates risks that inflation in the US will go up again.
Last year, inflation in the US rose to a 40-year high. And the US Federal Reserve had to raise interest rates very sharply in the fight against this. And now economists are wondering whether the Fed will be able to stop or whether it will have to continue to raise rates. And this is fraught with risks of new bank failures, financial instability and the emergence of a full-fledged crisis.
Another victim of the coordinated actions of Russia and Saudi Arabia was the European Union. First, the EU is a major oil importer, so its energy costs rise directly as world oil prices rise. Secondly, the European Union has placed itself in a less advantageous position by forcibly ousting from its market a large and, most importantly, more profitable oil supplier, Russia. At the very least, the cost of transporting Russian oil to Europe was lower, and now this item of expenditure for Europeans has clearly increased. Not to mention that European refineries often had lucrative contracts to supply crude oil from Russia.
All this has led to the fact that Saudi Arabia, which is now actively supplying its oil to Europe, easily goes to increase the price of its oil. After all, Europe has nowhere to go, it now has little choice. The Saudis have been raising the price of their oil for the third month in a row. And now it has been announced that from September, Saudi Aramco will raise prices again for consumers in Europe and Asia. For customers in the North-West of Europe, prices increase by 1-3 dollars. For buyers in the Mediterranean, the increase in prices turned out to be slightly softer - by 0.1-1.5 dollars per barrel. This will clearly lead to higher fuel prices in Europe. Gasoline is already getting more expensive there amid growing demand and problems with its own processing: many European refineries were sharpened for heavy oil from Russia, and now its supplies are sharply limited (only kept through the pipeline).
The EU as a whole is faced with the same problem as the US - with inflation and its unpleasant consequences. In an attempt to fight inflation, the ECB is taking the same steps as the Fed. At the same time, the consequences for the European economy from further tightening of monetary policy may turn out to be no less sad than in the United States. Economists are already saying that the eurozone could slide into a real recession in 2024. Moreover, some do not rule out even a serious fall in the eurozone economy to 5%. The consequences of this crisis, if it happens, will be even worse than the last one in 2008-2009.
However, the problems of Western countries are of little concern to Saudi Arabia and Russia, since the world's two largest oil players solve their own problems. They are extending the restrictions on the supply of oil in the market, because demand problems from China are visible.
On Tuesday, oil prices fell 1% as data on China's imports and exports in July showed a contraction much larger than expected. This is a sign of a rather sluggish post-COVID recovery in the Chinese economy. And China is the world's largest oil importer, so it determines global demand.
Moreover, the trend towards a decrease in oil imports is already visible in the dynamics of oil purchases by India, points out Tatyana Skryl, Associate Professor of the Department of Economic Theory of the Russian University of Economics. Plekhanov. Bloomberg analysts estimate that oil imports from Russia to India have been falling for the second month after a record volume of deliveries in May of 2.2 million barrels per day. In July, India has already bought 2.09 million barrels, and in August, imports may fall to 1.6 million barrels, Kpler analysts calculated. This can be partly explained by the fact that Russia deliberately decided to cut oil exports in August and September. She will sell less, but at a higher price. “The reduction in oil production will lead to an increase in the cost of the Russian Urals oil grade to $80-85 per barrel, which will also reduce the discount between Urals and Brent grades. But taking into account that Since most of the proceeds go to the Russian budget in Chinese yuan and Indian rupees, it is worth reconsidering the assessment of the cost of oil in dollars,” says Skryl. According to her, the OPEC + decision should stabilize the situation in the oil market and bring demand and supply into balance.
In addition, if Russia reduces only oil exports, but not production, and at the same time fills domestic storage with crude oil plus increases the export of petroleum products, then budget revenues will not suffer either. Because in any case, companies will pay the mineral extraction tax plus export duties on a larger volume of oil products, says Igor Yushkov, an expert at the Financial University under the Government of the Russian Federation and the National Energy Security Fund.
It is possible to store oil or oil products in internal storage facilities until the autumn in anticipation of a rise in prices, wait for this rise in prices and then sell the accumulated volumes on the world market, the expert believes. In this case, the budget will receive even more income in the form of export duties.
Already in August, the Ministry of Finance of the Russian Federation is waiting for additional oil and gas revenues. Although since the beginning of the year, the opposite situation has been observed - oil and gas revenues did not reach the expected ones, so it was necessary to sell currencies and gold from reserves within the framework of the budget rule in order to support the ruble and budget revenues.
However, already in August, the authorities will return not to selling, but to buying currency and gold, that is, accumulating reserves, as revenues will exceed the plan by 73.2 billion rubles, according to the forecast of the Ministry of Finance.
This article originally appeared in Russian at iz.ru