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OPEC keeps refusing G7 requests to increase oil production as ‘Russian oil cap’ reverie falls apart

By Drago Bosnic | July 8, 2022

One of the two central topics of the most recent G7 summit was limiting Russia’s oil sale profits. The initial suggestion of capping the price to just above the production costs hit a little snag when reality kicked in and it turned out to be impossible without, ironically, pushing the oil prices exponentially higher, despite the fact that current prices have already pushed economies to a breaking point. In order to tackle the “unexpected” issue, Japan gave a “more reasonable” suggestion to “only cut Russian oil prices in half”. Naturally, Moscow took neither of the suggestions too kindly. Deputy head of the Russian Security Council Dmitry Medvedev warned that Japan’s proposal would lead to a significantly lower supply of oil on the market, which could push the price to around $300-400 per barrel or higher.

“Japan will have neither oil nor gas from Russia, nor will it be able to continue participation in the Sakhalin-2 LNG (liquefied natural gas) project,” Medvedev commented on reports about the proposal presented by Japanese Prime Minister Fumio Kishida.

The other central topic was yet another request by the political West for OPEC+ countries to increase oil production. And once again, OPEC+ refused, insisting that Russia’s oil production share cannot be replaced. The association of 23 oil-producing countries keeps insisting on its earlier decision to collectively increase daily production by 648,000 barrels in July and August, but nothing more than that. Worse yet, how OPEC+ will fulfill even that remains to be seen after recent reports that some members are struggling to meet even their own internal demand, as OPEC’s leading countries are already at maximum production capacity. French President Macron himself revealed to his G7 partners that in a conversation with top Saudi and UAE representatives he was told that Riyadh and Abu Dhabi are already producing oil “almost at maximum capacity”.

Faced with the first signs of coming oil shortages at the peak of the summer season in the Northern Hemisphere, the political West could not figure out where to expect an increased inflow of oil during July and August. If the sanctions on Russia, the world’s key oil exporter, are kept or, worse yet, intensified, where could the “requested barrels” come from? The lifting of sanctions against Venezuela and Iran isn’t just “problematic” for the political West, but it’s also questionable whether they are able (or willing) to increase production. In addition, any production increase by US shale oil companies seems equally unlikely this summer.

Non-OPEC oil producers such as Brazil and Canada cannot hope to make up for the deficit of Russian oil. The political West is now sending conflicting economic signals as it’s faced with the very real possibility of a recession, which would inevitably result in a drop in demand. The prospect of this is discouraging the OPEC+ to increase production, as it could leave them with excess oil. To make matters for Western stock markets even worse, OPEC+ did not give any statements on its intentions regarding further production from September 1, when the current agreement on the gradual increase in production is set to expire.

The oil price in the US is already moving towards the “astronomical” six dollars per gallon, which will almost certainly lead America into another recession, according to the Wall Street Journal’s estimate. US President Joe Biden recently pointed out that “Washington DC has no way to quickly stop the rise in the prices of gas and food in the United States at this time”. The US is even considering measures in case oil soon reaches the price of $200 per barrel. It is in this atmosphere of uncertainty on a global level that the political West is trying to limit Russian oil revenues, obviously without considering the simple fact that Russia could just cut its oil supplies to anyone trying to impose this illegal price cap, which would make the $200 per barrel prediction “incredibly optimistic”, as oil prices could be pushed to more than double of that.

Additionally, there’s a looming uncertainty over Russian natural gas deliveries to the European Union, particularly Germany, which is now effectively begging Canada to return the Nord Stream turbines it has seized. The German industry, by far the largest and most important in the EU, is struggling to make any plans for the foreseeable future as natural gas deliveries, its lifeblood, hang in the balance. There are even warnings of a complete industrial collapse in Germany if this issue is not tackled as soon as possible, to say nothing of the natural gas demand for heating and energy production, which is now under tremendous pressure to meet even basic demand.

Despite all this, the political West keeps fantasizing about the Russian oil price cap. Although we’re still powering through an extremely hot summer, we are only several months away from winter. Maybe the political West can try capping the temperature and prevent it from falling below the freezing level. After all, their chances of doing that are much higher than capping Russian oil prices.

Drago Bosnic is an independent geopolitical and military analyst.

July 8, 2022 - Posted by | Economics |

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