What you see under the price of Brent over the past week, after a cut of two million barrels decided on Monday by OPEC+. You already know what this means: higher crude oil prices, potentially more inflation in our countrieshence more aggressive monetary tightening by the Federal Reserve and the European Central Bank up an economy (especially the euro area) in which the indices are already signaling entry into a recession and in which governments are bleeding – into debt – to at least partially protect families and businesses from the stellar costs of bills and fuel.
That of OPEC is a substantial production cut equal to 2% of world consumption, although Brent was already not far from one hundred dollars a barrel, still above the levels of the beginning of the year and Europe was already in the midst of the worst energy shock since half century.
a cut, led by Mohammed Bin Salman’s Saudi Arabia and supported by Putin, wanted by Opec four weeks before the mid-term elections in which Joe Biden is betting on the feasibility of his second two-year term in the White House precisely on the cost of fuel . And finally a cut that raises oil prices by more than 10% – specifically – two months after the entry into force of the G7 prce cap: the price ceiling demanded by the West on all Russian oil sold to the rest of the world. The OPEC+ resolution arrived at a meeting in Vienna where the ministers of the twelve countries made the extraordinary decision to meet in person. The Russian Alexander Novak, deputy premier and himself under American sanctions, took the opportunity to launch his cross-threat from Vienna: Moscow would cut supplies, he said, to any country that had to accept the ceiling on the price of Russian oil proposed by the G7.
The White House reacted very badly: it is clear that OPEC+ is aligning itself with Russia, Biden’s spokeswoman cut short. The Democratic president experiences Bin Salman’s move as a stab in the back, a vote by the young and brutal Saudi prince to install a Republican in the White House in two years: be it Donald Trump or an apparently more rational version of him, embodied by the Italian-American from Florida Ron DeSantis. I’m no oil expert, but I have the impression that the key to this confrontation is once again precisely Putin’s war. Increasingly, it is becoming an international economic conflict whose stakes are beyond Ukraine’s control. In the following part of this newsletter, I will therefore try to explain to you the concatenation of causes and effects. I try to explain why this production cut seems to me to be OPEC’s response to the ceiling on the price of Russian oil wanted by the G7 which, in turn, is the United States’ reaction to the European embargo against Moscow’s crude oil in force since next January first.
The rules that don’t exist
The invasion of Ukraine has triggered a domino effect which exposes the absence of rules in the world economy, accelerates the end of thirty years of peaceful commercial globalization and is destined to rewrite the geography of power over the most strategic raw materials. If I had to express it in a formula, I would say this: Putin’s war is causing a clash between a cartel of buyers (We Westerners) and a cartel of sellers of fossil energy (Opec plus Russia). a struggle in which each side seeks to subdue the other with the weapons of brutal economic force, with no attempt at compromise. But let’s go in order. Since the beginning of the war, Russia has collected nearly 200 billion euros from the sale of fossil energy; gas has attracted most of the attention, but oil has attracted most of the revenue from the rest of the world: since the day of the invasion of Ukraine 61.5% of hydrocarbon revenues came to Moscow from crude oil and only 31% from methane. Even for Europe alone, Russian oil imports are higher in value than gas imports. Since tax revenues from energy make up about 40% of the Russian public budget, to stop Putin’s war machine it becomes essential to hinder his oil export machine. There are no alternatives.
The Union embargo
The European Union has started to do this with the embargo which will come into effect from January:with a few justified exceptions, it becomes illegal in Europe to buy crude oil from Moscow. But the sacrifice could be useless if Putin’s state companies were allowed to divert exports by ship, simply, to other destinations. Since this autumn, purchases of Russian hydrocarbons by China and India have in fact risen markedly: for the former, imports have increased from 150 to almost 230 million on average per day, for the latter from 20 to over 90 million on average per day. day. For this reason, America entered through the G7 (which also brings together Japan, Germany, France, Great Britain, Italy and Canada) with the idea of the price cap: the Group of the seven largest of the West sets a reduced ceiling for Russian oil , so that any country that pays the Russians more is automatically kicked out of American markets. Basically, the same system is applied today for Iran: if, for example, an Italian bank did business with a Tehran company, it would immediately lose access to Wall Street. Not desirable.
Who blocks who
In particular, this is a measure against Russia by seven countries that account for about half of the world economy. But this is also the first major attempt by the liberal superpowers – those that have shaped globalization over the past thirty years – to set up a buying cartel on a strategic raw material. a hated precedent for the countries producing those raw materials. Seen from Opec, today it may apply against Moscow but tomorrow it could affect Saudi Arabia or any other country in the sellers’ cartel. And seen from the rest of the world, today the buyers’ cartel applies to crude oil but tomorrow it could apply to lithium, rare earths, cobalt or any other mineral controlled by China and essential for the revolution of renewable sources or the electric car. That is why, I think, OPEC’s reaction was so violent. That’s why she was so supportive of Putin. an attempt is underway to subjugate energy consumers by producers of it.
Effects on rates
The negative consequences will not be long in coming and will also be schizophrenic: the big Western central banks will raise rates even more to counter the resulting inflation, while Western governments will run even more deficits and debt to compensate their voters for the impact of expensive energy. The week of meetings of the Monetary Fund therefore opens under the banner of great global disorder. Not only producers and consumers of fossil fuels are at economic war with each other. Even some consumers may be the same with others, given that the United States no longer rules out limiting their exports of crude oil to the rest of the world (they are today the world’s third largest exporters after the Saudis and Russians). And in our own countries, even central bankers and politicians push their economic policies in opposite directions: the first try to implement restrictive policies, the second expansive. Something’s gotta give, Americans say. Someone or something, somewhere, has to give in at some point. The week of the IMF Annual Meetings will surely shed some light. And we’ll talk about it next Monday. Have a good week.
This article was originally published in Federico Fubini’s newsletter on Corriere.it. To receive it, you sign up directly from the site, from the newsletter page: just open the Whatever it Tak€s window and click sign up.
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