The main players in the modern crude oil export market are the United States, Russia and the OPEC+ countries, the former three accounting for over 90% of the world’s total oil exports. The three have intricate interests, and competition and conflict are constantly playing out between them. For OPEC+ members and Russia, the cost of oil extraction is extremely low and they can afford a lower oil market, but oil exports are an important source of economic income for these countries and contribute a significant amount of their GDP, while for the US, shale oil, which is extracted in the US, is expensive to extract and the extraction companies are highly privatized, so a prolonged period of low prices could hit the US crude oil extraction industry hard. However, the US government intends to intervene in international oil prices to preserve its strategically important oil industry through its strong international influence and international political leverage. In the past, the interests of the three parties have been balanced by their respective increases or decreases in production of their own oil, but since the Russo-Ukrainian conflict, a new political factor is being created: Europe and the US will impose price caps on Russian crude oil exports.

Although the exact figures for the price cap on Russian oil exports have not yet been announced, there is no doubt that the sanctions will be put in place on December 5. And, Europe and the United States are well positioned to put this measure into strict effect. Some 95 per cent of the world’s tanker fleet is insured by the London-based International Group of P&I Clubs (IGPIC) and a number of continental European-based insurers. Western governments could try to tell buyers of Russian crude that if they want to continue to use the insurance, they would have to agree to buy Russian crude within a certain price range. This would have the effect of setting a price cap.

Nevertheless, this sanction would be difficult in practice. On the one hand, there is no consensus within the EU on the benefits of this initiative. Some countries have previously expressed a desire to set the cap at between $65-70, but countries eager to control their domestic energy costs, notably Poland, Spain and Greece, have said that the proposal is unrealistic and that the cap is set too high and unlikely to be triggered. But for Cyprus, Greece and Malta, countries with large maritime industries, they stand to lose the most if trade in Russian oil is hampered. For their part, they believe the cap is too low and are demanding compensation for lost business or more time to adjust. As sanctions require the unanimous agreement of the 27 EU member states, the package will take weeks to be approved and will have to overcome major obstacles.

On the other hand, if the allies do agree on a price cap, but fail to adhere to it, this would give Putin a symbolic victory. Moreover, such an approach could risk failure on several fronts: for example, there is no guarantee that Russia will agree to transport oil at the capped price, especially if the price is close to the cost of production. Russia has already made its position clear on gas shipments, and the country is willing to stop supplying gas to some EU countries that refuse to meet its payment requirements. The Kremlin may also argue that temporarily denying oil access to the market would cause greater damage to the European and North American economies than itself.

Adding to the uncertainty in the international crude oil market is the fact that OPEC+ will also meet to decide on oil production the day before EU sanctions against Russia officially take effect on 5 December, adding to the confusion of this already volatile oil price. The OPEC+ meeting on oil production this week has also become the focus of market attention at a time when the possibility of a significant cut in production of Russian oil or as a result of EU sanctions has soared. 22 November saw news that Saudi Arabia and other OPEC+ members were considering increasing crude oil production by up to 500,000 bpd and that OPEC+ would meet on 4 December to announce the decision, triggering a huge shock in the crude oil market, with Saudi Arabia, Kuwait and the UAE quickly came out to dispel the rumors. On 25 November local time, the Saudi energy minister and the visiting Iraqi energy minister announced that they would abide by OPEC+’s recent decision to cut production. The two officials also said that OPEC+ has the ability to take further action if necessary to achieve balance and stability in the market.

A few days ago, crude oil prices have fallen by a cumulative 15% in November, with Brent crude oil up or down by less than 1% for only three trading days. 22 November, the international crude oil market was even shaken sharply with rumors that OPEC was considering increasing production by more than 6%, and on 28 November, WTI crude oil fell by more than 3.0% intra-day to US$74.17/barrel, a new low in 2022. At present, European countries and the United States on the mainstream hope that international crude oil prices can be lowered as a way to curb domestic inflation problems, but OPEC+ countries hope to obtain more adequate domestic foreign exchange cash by cutting oil production. In the case of Russia, if the EU sanctions on Russia are in the $65-70 range, they will not have a significant impact on the country’s economy. The specific impact this oil price conflict will have on the market will have to await the OPEC+ meeting on 4 and 5 December and the announcement of specific EU sanctions against Russia.

By JIN Kaiwei