JPMorgan Chase chairman and chief executive officer Jamie Dimon says he expects the price of oil to go up — all the way up to $175 a barrel. True, this comes in the wake of two back-to-back developments: the European Union’s decision to abstain from Russian oil and oil cartel Opec’s decision to raise output to a less than fulsome extent than had been anticipated. Even then, and notwithstanding Dimon’s gender, it is difficult not to conclude that the lady doth protest too much.
There are a number of factors acting against a near 50% rise in the price of oil above present levels. One is the moderation in demand that covid has brought about. The International Energy Agency says that global demand in 2022 is expected to be 99 million barrels a day, as against the pre-pandemic forecast of 103 million barrels a day. The Ukraine war and covid lockdowns in China have further depressed likely demand, because of the expected fall in global growth. The same people on Wall Street who fret over high oil prices also worry about belated and sharp rate hikes by the US Fed, in its attempts to bring inflation down, also landing the US economy in a recession. Recessions depress oil demand.
But it is not so much conditions of demand as conditions of supply that make a sharp and sustained rise in oil prices unlikely. To begin with, Europe has banned Russia’s seaborne oil. Oil flowing into eastern Europe by pipeline will continue to flow. Now, it is difficult to understand why oil that, in any case, leaves Russia by tanker, cannot move to another destination: tankers are not built to home in on Europe. All that is required is for Russia to find alternate buyers.
Things are different with natural gas. To transport gas to a new destination, new infrastructure is called for: pipelines to the new buyer, new plants to liquefy gas into Liquefied Natural Gas (LNG) in Russia, new terminals with berths for large tankers carrying gas stored at extremely low temperature and high pressure at the new export destination, facilities for converting the liquid back into gas, and new pipelines to transport gas from the importing terminal to where it would be used or LNG tankers on wheels. Such infrastructure is not easy to build. That is why the European Union continues to feed the Russian war machine with its continued import of natural gas from Russia, even while announcing a boycott of Russian oil.
Now, there could be a temporary disruption of Russian oil supplies while it finds alternate buyers. The price of oil could nudge up in the interim. That will make Russian discounts more appealing than before. Further, it would tempt OPEC members to produce more than what their member quotas allow them to. No, the oil cartel members are not boy scouts and do cheat on their commitment to stick to production quotas.
As oil prices go up, a very powerful lobby will begin putting pressure on western governments to bring prices down: consumers, who find inflation eating into their purchasing power, with food and energy prices doing most of the gobbling. Their roar of protest will send governments scrambling to increase oil supplies.
Bringing on stream production capacity that has been put out of action by previous sanctions is one option. Both Iran and Venezuela can add millions of barrels to the global supply. Iran has been clandestinely producing and shipping oil, even if not at full capacity. Iran is best placed to increase production, should the US and the EU find their way to reviving the Iran nuclear deal that President Trump had torpedoed. Venezuela’s oil infrastructure is in a bad shape, and it will need time and investment to bring production back to capacity. So, however, will Europe to transition from Russian oil to oil from other sources.
American shale oil is another potential source of additional supply. The frackers have, so far, been holding back, intent on financial discipline and servicing their capital rather than on increasing output. But when the price of crude stays above $100 a barrel, it becomes possible to both service past financing and invest in new production. It is a different matter that the Ukraine war would result in Europe substituting the US for discarded Russia as the principal supplier of oil and gas to Europe. Pure geopolitics, of course, the commercial aspect being an accidental byproduct.
Can Russia find new buyers? As Europe scoops up supplies of oil from traditional producers, paying higher than what their traditional customers have been paying, those customers would be only too happy to buy Russian oil. A country like China would buy Russian oil openly, without any subterfuge. Others might prefer to act deferential to western sentiments and buy Russian oil in more covert ways. But buy, they will.
Especially as there are no secondary sanctions on Russian entities. A company that violates a primary sanction and companies that do business with that primary violator would all face sanctions under a regime of secondary sanctions. But the US and Europe cannot place secondary sanctions against Russian entities because many European entities still do business with Russia.
Sauce for the European goose should be sauce for the Indian gander, too.
India should welcome Russian oil, especially when offered at a discount. Covid has hurt large parts of the informal economy. People are hurting. There is no reason for India to be part of the ‘any cost’ at which the West wants to see Russia brought to its knees, even as, as India’s external affairs minister S Jaishankar pointed out, European countries continue to buy gas from Russia. Buying Russian gas is an economic imperative for Europe. Buying the cheapest available oil is not just an economic imperative for India, but also, given its desperate need to improve the lives of so many, a moral one.
Given the fungibility of oil and its relative freedom from infrastructure specific to an export-destination, it is difficult to prevent the oil sanctioned by Europe from finding its way into the market.
Dimon seems to have put his Ferragamo-shod foot on an oil slick.
Source: livemint.com
