If you’re confused by 21st-century energy geopolitics, it’s not your fault.
The Russia/Ukraine war, the EU’s economic crisis, global energy prices, rising inflation and interest rates, and the G7/EU price cap on Russian oil exports announced on Dec. 5 have created daunting challenges for international politics and diplomacy.
The most recent solution is one whereby G7 member Canada has helped make oil cheaper for the world without relaxing existing commitments – carbon taxes, emissions caps, and the Clean Fuel Regulations – to increase Canadian energy costs.
For carbon taxes to effectively deter fossil fuel consumption, the price of oil, gas and coal is supposed to go up. We’ve been repeatedly told that “a price on pollution” is essential to avoid climate disaster.
But the Dec. 5 Russian oil price cap mechanism is engineered to cause oil prices to go down. This stimulates consumption and makes renewables less competitive.
While U.S. President Joe Biden’s energy policies are rife with contradictions, one of his administration’s primary goals has been to keep oil prices as low as possible. For a president who ran on a climate protection platform in 2020, this is not intuitive.
Following the symbolic cancellation of Keystone XL in early 2021, oil prices began to rise. For the past 18 months, Biden has reached out to OPEC, Saudi Arabia, Iran and Venezuela in a quest to increase oil production and suppress gasoline prices.
The most recent move saw the U.S. encouraging Chevron to increase production from its mothballed and sanctioned Venezuelan assets. Get the world more oil. Just don’t give any money to Venezuela’s government.
At the same time, America’s Strategic Petroleum Reserve (SPR) has been competing for months with domestic producers by putting about one million barrels per day of crude into world markets. Lower prices send a signal to oil companies not to drill. High prices have the opposite effect.
When Biden assumed office in January 2021, the SPR held 638 million barrels. As of mid-October, it was down to 405 million barrels, a 37 per cent decline. SPR drawdowns are expected to end this month, by which time the reserve could be down to 350 million barrels. This has helped keep oil prices lower for much of 2022.
After Russia invaded Ukraine in February, an angry EU concluded that the most effective non-military way to punish Russia was to quit buying its oil and gas, thus squeezing funds for its war machine. An oil embargo was planned for late 2022, and oil prices rose in anticipation of a supply shortage.
Instead, on Dec. 5, the G7 countries and the EU adopted a U.S.-led plan to allow Russian oil exports but capped the price at US$60 a barrel. In an interview, oil guru Daniel Yergin , “It’s the end of the global oil market as we’ve known it for the last 30 years. It’s now a partitioned oil market and no one can speak with any authority as to how it will play out.”
And the price cap became a floor price. A Reuters article Dec. 6 opened, “When U.S. officials first floated the idea of capping Russian oil export prices in response to a planned European embargo in March, they pledged to squeeze revenue to Russia’s war machine while avoiding a devastating oil price spike. But keeping Russian oil on the market and global prices low soon became the bigger priority as oil prices jumped.”
Analysts have concluded the price cap will have little impact on Russia’s oil revenues because Asian countries like India and China are thrilled to be purchasing more oil at lower prices. What Russia loses on price will be offset by volume.
Quoting unnamed U.S. Treasury officials, Reuters wrote, “… the price cap is ‘institutionalizing’ current market discounts, arguing that plans for the cap were responsible for price declines over the past several months ….”
The U.S. opposed a complete EU-Russian oil boycott because it would drive up U.S. prices. The Reuters article stated the “… true motivation after March has been primarily to preserve Russian oil flows … if there was an oil price spike, not only will it hurt us economically and politically, but it’ll damage Western support for Ukraine. As the G7 formed the plan, India and China have snapped up heavily discounted Russian oil and are expected to continue big purchases outside the price cap, moves endorsed by Treasury Secretary Janet Yellen.”
Yellen made her position clear at the G20 meetings in Asia last month. An Arab News headline read, “Oil prices fall; Yellen says price cap on Russian oil will benefit China.” The article continued, “Yellen told reporters … that China and other buyers of Russian oil will have more leverage to negotiate lower prices. ‘We see the price cap is something that benefits China and India, and benefits all purchasers of Russian oil.’”
Maybe it’s more complicated than it appears. Perhaps central planning feared that a truly isolated Russia would retaliate with its nuclear arsenal. And a prolonged war in Ukraine and lower oil prices was the best solution under the circumstances.
But Canada’s position is remarkable.
Support lower oil prices for the world but make Canadians pay more in the name of climate change.
This explains why I’ve never been tapped by Ottawa for advice on complex public policy issues.
David Yager is an oilfield service executive, oil and gas writer, and energy policy analyst. He is the author of鈥疐rom Miracle to Menace – Alberta, A Carbon Story
Troy Media
