December 5, 2022
Let's talk about oil.
The Western world put a $60 price cap on Russian oil, beginning today.
What does it mean?
The view from the politicians is that the price cap keeps Russian oil flowing to the world, but squeezes Russia's energy revenues (which fund almost half of the Russian federal budget).
Russia has said they will respond to a price cap by refusing to sell oil to those countries supporting the price cap.
Who has the leverage?
The Western leaders would have us believe they can suffocate the Russian economy, and therefore force an end to the war in Ukraine.
But guess which of the largest economies in the world aren't part of the oil price cap coalition? China.
And guess who has become China's largest oil supplier? Russia.
Given the structural global supply deficit in the oil market, China should be happy to snap up all of the oil Russia can sell to them (and then stockpile it, or sell it to the Western world). And no surprise, they have been importing oil at record levels for much of the past two years.
Not only is the world undersupplied of oil, we are (most importantly) underinvested in new supply. And it's all by the design of the global clean energy transformation, which is coordinated by: the Western world (the purveyors of the price cap).
Leverage doesn't appear to be on our side. And that's apparent through OPEC's response to the Russia price cap, which was a threat of further production cuts (i.e. less supply).
With that, this price cap should ultimately give us lower global supply, and higher prices.
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