/ world today news/ The well-coordinated actions of Saudi Arabia and Russia to limit oil supplies have already begun to yield results. On the one hand, this has an unpleasant effect on Western countries in the form of rising gasoline prices and the risk of recession. On the other hand, the price of Russian “Ural” is already increasing, which promises to return oil and gas revenues to Russia.
Russia and Saudi Arabia’s restrictions on the oil market have begun to have a negative impact on the US and EU markets.
According to the American Automobile Association, US retail gasoline prices are on the rise again, threatening to exacerbate the inflation problem that the Federal Reserve has been fighting hard by raising interest rates. A gallon of gasoline traded for an average of $3.89, the highest level since October 2022.
The increase in the price of gasoline is due to the increase in the price of oil on the world market. Both Brent and WTI benchmarks are trading above $80 per barrel. The price increase was possible due to the fact that Saudi Arabia and Russia continue to reduce the supply in the market. On August 1, new restrictions came into effect, which both countries accepted. Saudi Arabia cut production by 1 million barrels per day for the month and Russia cut oil exports by 500,000 barrels per day.
In the case of Russia, a decrease in exports does not necessarily mean a decrease in its production. Various options are possible here, including diverting some of the oil for internal processing. The obtained additional quantities of oil products, in turn, can be used both for the domestic market and for export. In this regard, the unofficial information that the Belarusians want to stop the supply of their oil products to Russia, whose volumes are already not large, should not seriously affect the domestic market.
The other day at the OPEC+ ministerial meeting, Saudi Arabia announced that it would voluntarily extend production cuts 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 appear that Washington benefits from more expensive oil. However, this benefits the country’s oil industry, which is represented by private companies, but not the country as a whole and its “green” president. Joe Biden openly criticized Saudi Arabia and insisted that it not raise oil prices, but no one listened.
For the US, expensive gas is a problem because most Americans travel by car, and for them gas costs are an everyday expense, along with food and rent. A one-cent increase in the price of a gallon of gasoline in the U.S. takes away about $1.15 billion in purchasing power annually, estimated Brett Ryan, senior economist at Deutsche Bank. This means that consumers start spending more money on gas and have less money left over for other goods and services.
In addition, motorists in the US are very active voters, whose opinion is extremely important in elections. The election of the American president is a little more than a year away. Last summer, Joe Biden had to sell a huge chunk of the nation’s strategic oil reserves to keep gas station prices low and retain the loyalty of the electorate. And now this question – how to keep the price of gasoline at gas stations – is being faced with new force.
Finally, higher gasoline prices lead to higher prices everywhere for all goods and services. And this creates risks that inflation in the US will go up again.
Last year, US inflation hit a 40-year high. And the US Federal Reserve had to raise interest rates very sharply to fight it. And now economists are wondering whether the Federal Reserve will be able to stop or whether it will have to keep raising interest rates. And this increases the 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 importer of oil, so its energy costs rise directly as world oil prices rise. Second, the European Union put itself in a more disadvantageous position by forcefully pushing out of its market a large and, most importantly, more profitable supplier of oil – Russia. At least the cost of transporting Russian oil to Europe was lower, and now that cost to Europeans has apparently increased. Not to mention that European refiners often had lucrative contracts to supply crude oil from Russia.
All this led to the fact that Saudi Arabia, which is now actively supplying its oil to Europe, is easily going to increase the price of its oil. After all, Europe has nowhere to go, not much choice now. The Saudis are raising the price of their oil for the third month. And now they have announced that from September Aramco will once again raise prices for consumers in Europe and Asia. For customers in Northwestern Europe, prices increase by one to three dollars. For buyers in the Mediterranean, the price increase turned out to be a little softer – by 0.1-1.5 dollars per barrel. This will obviously lead to higher fuel prices in Europe. Gasoline there is already rising in price amid growing demand and problems with its own processing: many European refineries were set on heavy oil from Russia, and now its supply is sharply limited (held only through the pipeline).
The EU as a whole faces the same problem as the US – with inflation and its unpleasant consequences. In an effort to fight inflation, the ECB is taking the same steps as the Federal Reserve. At the same time, the consequences for the European economy of further tightening of monetary policy may turn out to be no less sad than in the US. Economists are already saying that the eurozone could fall into a real recession in 2024. Moreover, some are not even ruling out a serious decline in the eurozone economy of up 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, as the world’s two largest oil players are solving their own problems. They are extending restrictions on the supply of oil to the market because of problems with demand from China.
Oil prices fell 1 percent on Tuesday as data on China’s July imports and exports showed a much larger-than-expected contraction. This is a sign of the rather slow recovery of the Chinese economy after the pandemic. And China is the largest importer of oil in the world, so it determines global demand.
In addition, the tendency to reduce oil imports is already visible in the dynamics of oil purchases from India, points out Tatyana Skrill, Associate Professor of the Department of Economic Theory of the Plekhanov Russian University of Economics. According to Bloomberg analysts, the import of oil from Russia to India has been decreasing for the second month after a record volume of deliveries in May – 2.2 million barrels per day. In July, India already bought 2.09 million barrels, and in August imports may fall to 1.6 million barrels, Kepler analysts estimated. This can partly be explained by the fact that Russia deliberately decided to reduce 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 price of the Russian grade of Urals oil to 80-85 per barrel, which will also reduce the discount between the grade and Brent.” But given the fact that most of the revenue goes to the Russian budget in Chinese yuan and Indian rupees, it is already worth revising the assessment of the price of oil in dollars,” says Skrill. According to her, the decision of OPEC+ should stabilize the situation on the oil market and balance supply and demand. On Tuesday, a lot of oil was sold in Russia at a record high price since the beginning of the year – 86.31 dollars per barrel. This is shown by the data of the St. Petersburg Commodity Exchange, which organizes the trade in physical batches of crude oil.
In addition, if Russia only reduces oil exports, but not production, and at the same time fills up its domestic storages with crude oil plus increases exports of petroleum products, then budget revenues will not suffer either. Because in any case, companies will pay the tax on the extraction of minerals plus export duties for a larger volume of oil products, says Igor Yushkov, an expert from the Financial University of the Government of the Russian Federation and the National Energy Security Fund.
It is possible until autumn to store oil or oil products in domestic storages in anticipation of an increase in price, wait for this increase in price, and then sell the accumulated quantities on the world market, the expert believes. In this case, the budget will receive even more revenue in the form of export duties.
Already in August, the Ministry of Finance of the Russian Federation expects additional revenues from oil and gas. Although the opposite situation has been observed since the beginning of the year – revenues from oil and gas did not reach expectations, therefore it was necessary to sell currency and gold from reserves within the budget rule to support the ruble and revenues in the budget.
However, already in August, the authorities will return not to selling, but to buying foreign currency and gold, that is, accumulating reserves, since revenues will exceed the plan by 73.2 billion rubles, according to the forecast of the Ministry of Finance.
Translation: V. Sergeev
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