Does the West still view India with suspicion on its stand on Russia oil? Or has the West’s need for fossil fuel and Russia’s position in the global energy space softened its position on India?
The changing dynamics in the global oil space also shows consumers like India are emerging as a voice for bringing market stability — after all if there are no buyers where will suppliers go?
So, has the price cap on Russian oil purchase been a success? The opinions vary. Yes, output cuts have happened but parallelly in sync with the global oil prices, there has been an upward swing in prices of Russian oil variants too.
Russian crude oil price cap: Is India bringing stability to the oil market?
According to Bob McNally, founder and President of Rapidan Energy Group, a DC-based consulting firm, and former White House energy policy advisor, “The main goal of the price cap was to prevent EU sanctions on Russia from overtightening the crude market by offering an off-ramp. In this objective, the cap has been successful. However, until recently, the cap’s success was facilitated by Urals trading below the $60 capped level. Now that Urals is above the cap, it will pose a stress test for policymakers.”
“I expect soft enforcement to continue for the time being, but should US officials believe the cap was beginning to restrict Russian exports, they would move to increase it,” he said.
“Leave well enough alone”: How India is bringing stability to the oil market
There was a time when all fingers were being pointed at India for not following the G7 price cap on Russian crude oil and also flooding the market with Russian processed refined petroleum products. Has that changed now?
“With distillate stocks low and prices and spreads high, officials are more worried about oil prices derailing the soft landing and therefore will likely continue to tolerate India’s diesel exports even if refined with Russian crude,” McNally said.
Lauri Myllyvirta, Lead Analyst; Co-founder Centre for Research on Energy and Clean Air, an independent international research organisation, feels that “Overall, Russia’s revenues from oil exports have dropped sharply this year, while the invasion has driven up military expenses. The fall in tax revenue from oil already helps limit Russia’s military spending and end the war more quickly.”
He also pointed out that “It’s been hard to distinguish the effect of the EU’s oil import ban and the oil price cap on Russia’s earnings. Our analysis has been throughout that the import ban is by far the most impactful measure. The price cap did however contribute by limiting the tanker capacity available to move Russian oil and increasing the risk for tankers that load Russian oil, driving a wedge between prices paid for oil from Russia and other sources. This happened at a time when Russia’s need for tanker capacity increased, as oil began to be transported longer distances, e.g., to India instead of to Europe.”
Lax enforcement
But most agree that the enforcement of the cap has been lax.
“However, the enforcement of the price cap has been very lax from the start and market participants have gradually learned not to expect consequences from violating the policy. Russia and OPEC have successfully gamed the oil market and pushed Russia’s selling prices above the price cap — this is only possible when the cap is not being enforced effectively,” Myllyvirta said.
The price cap has had an impact but not to the intended extent, for two reasons: failure to revise the level of the cap down periodically, failure to enforce the cap effectively, he added.
“Russia continues to rely on tankers owned or insured in Europe for three fourths of the tanker capacity that carries its exports. This shows that if the price cap coalition could overcome its habitual timidity and implement the policy to its full potential, this would have a massive impact on the revenue accruing to the Russian state and to the military,” he points out.
According to Myllyvirta, “It would highly likely have made purely economic sense for India to join the price cap. There is no way for Russia to sell its oil if India stopped buying, so the country would have very strong market power if it joined the cap rather than individual buyers trying to negotiate discounts with Russian exporters.”
India has become a hub for refining Russian crude oil, due to the “refining loophole” that the US, EU and others left in their bans on importing Russian oil, he said adding that “There are increasing calls from Ukraine and within western countries to close this loophole, but as long as these governments continue to allow Russian oil refined in third countries into their markets, it’s hardly realistic for India or other countries involved in the refining trade to close the loophole for them.”
Are the recent decisions of the oil producing nations changing the dynamics of the global oil market?
Output cuts
OPEC+ has successfully stayed ahead of softening demand with their output cuts, Myllyvirta said adding China’s restocking has made this easier but that support should have played out by now.
“Demand destruction due to high prices and triumph of EVs will make it hard to sustain the high prices though. If the price cap on Russian oil was successfully lowered and enforced, that would change the incentives for Russia from a high prices approach to a high volumes approach which would balance the market on a lower level,” he pointed out.
As McNally puts it, “India’s emergence as a big and growing oil consumer, crude oil importer and product exporter coincides with a sea-change in global geopolitics, presenting novel risks and opportunities.
Most importantly, after decades of opening and engagement, democracies are turning to confront China’s nefarious expansion.”
“Other drivers include pressure to implement stringent decarbonization policies, the bifurcation of global oil and gas markets due to Russia’s invasion of Ukraine, and increased assertiveness and independence by Saudi Arabia and the UAE on the global stage,” he said.
Clearly, the changing dynamics in the global energy space have turned the spotlight on consumers like India.
As a major consumer, it is now up to India to leverage its position to its advantage.