Oil prices & war profiteering

MK Bhadrakumar
Former Ambassador

The finance ministers of the G7 countries — the US, Canada, the UK, France, Germany, Italy and Japan — approved on Friday the American proposal to impose a price cap on Russian oil in an innovative weaponisation of sanctions against Russia. But its targets also include China and India, Russia’s top customers. Big Oil hopes to stage a comeback in the Indian market to replace Russian oil.

The US hopes to kill three birds with one stone — cripple India’s oil trade with Russia; damage India’s ties with Russia; and push the Modi government into the western camp.

India’s strategic autonomy is coming under challenge to decide at what price and from where India can most advantageously source energy supplies, which is vital for the overall performance of its economy. Washington has happy memories of past regimes in Delhi crawling when it demanded the rollback of India’s oil imports from Iran and Venezuela and its substitution with imports from the US at exorbitant prices. History is repeating — except that India’s ties with Russia are highly strategic.

The US hopes to kill three birds with one stone — cripple India’s burgeoning oil trade with Russia; damage India’s relations with Russia; and, frogmarch the Modi government into the western camp in the new Cold War conditions. When Ukraine war broke out, the old Bush doctrine came roaring back — ‘You’re with us, or with the terrorists.’ However, Indian diplomacy remained eel-like — slippery and at home both in fresh water and sea. From the White House reaction to the Indian Army’s participation in the ongoing Vostok 2022 strategic command and staff drills in Vladivostok — that it has ‘concerns… but of course every participating country will make its own decisions’ — Washington’s exasperation shows.

The US is incensed that India stepped up imports of Russian oil at a discounted price. Deputy treasury secretary Wally Adeyemo recently visited Delhi to convey the firm message that Washington expects India to join the G7 move to impose a price cap on Russian oil. Adeyemo’s proposition: ‘If India joins the coalition, it can have a say in deciding the price cap’! He argued that the US price cap would give Indians substantially more leverage, driving down the price of Russian oil even further! Now, that’s a load of sophistry.

President Putin will most certainly regard the G7 price cap as a humiliating US diktat. Russian Deputy Prime Minister Alexander Novak said on Thursday, ‘We simply will not supply our oil and petroleum products to such companies or countries that will impose restrictions, because we will not work in non-market conditions.’ The Russian embassy in Washington warned that the US ‘is using tricks and sometimes blackmail to force…third countries.’

Sky-high energy costs have proven that there aren’t sufficient alternative oil and gas supplies. If Russia refuses to abide by the G7 regime and cuts production, that would cause further energy price increases in an already high-inflation environment. Or, Russia can simply close exports to those who agree to comply with the rules, and then the oil prices will really fly into space — the current figure of about $100 a barrel can easily double its value, or even triple, if the deficit reaches a threatening scale.

Indonesia’s Finance Minister Sri Mulyani Indrawati was spot on to underline that the problem today is basically that demand outpaces supply, which has been disrupted, and the price ceiling will not resolve that. She cautioned that as the US and European nations move towards winter, demand for energy will only increase further. India should heed the warning.

The G7 control mechanism is likely to be based on the fact that western financial and insurance companies control the services for transportation of oil worldwide. However, a significant part of the Russian flows is currently insured and financed bypassing western institutions, so the mechanism for monitoring the implementation of such an agreement will be limited. But the danger lies somewhere else: while the price cap policy will not put Russia under an immediate fiscal stress that the G7 expects, the market reaction will be unpredictable.

The point is, G7 is playing a trick on the laws of supply and demand, but you cannot defy the laws of gravity when it comes to a fungible commodity. The Russians are seasoned players in oil politics. They may increase the ‘spread’ of Russian oil to other benchmarks (current spread of Urals to Brent is about $20-25 per barrel). If the prices increase more than the increase in the ‘spread’, it compensates for whatever reduction in income due to the G7 price cap.

The bottomline is, Russia has no great need to sell in the prevailing conditions of overabundance of foreign currency in its coffers, and the US cannot match Moscow’s extensive networking with OPEC partners. India and Russia can jointly work out a roadmap. But the political will should be there to preserve India’s strategic autonomy.

The Biden administration is incensed that Russian oil virtually killed India’s oil purchases from the US. The heartburn must be there that the world’s number one market potentially for US energy exports remains elusive. Big Oil made a killing in the European market by replacing Russian gas at prices that are over almost 10 times the price per Gazprom’s long-term contracts with European customers! The prices of natural gas in Europe today are more than 10 times the level in the US itself!

Hungarian PM Viktor Orban noted recently with sarcasm that US oil companies are ‘profiteering’ from the war in Ukraine — Exxon’s profits doubled; Chevron’s increased seven-fold; and ConocoPhillips’ manifold more! Big Oil’s clout in the Wall Street is legion. It funds America’s political elites. The war in Ukraine is already fuelling the US military-industrial complex. If the Biden administration can unabashedly promote such neo-colonial policies in Europe, what can be India’s fate?