It is a oft-held misconception, particularly amongst certain political classes in the United States but also in Europe, that the conflict in Ukraine is driving hydrocarbon prices high: something which it is imagined is a bad thing because it inhibits economic growth. The logic is fairly obvious. Sanctions upon Russian hydrocarbon exports, whatever their form, drive prices up because they drive supply down. If Russian crude oil is sanctioned then less Russian oil will be available globally and therefore less oil will be available globally and given the laws of supply and demand, the price of oil will increase given static demand because Russia will have been at least partially excluded from the market in supply of oil by virtue of sanctions.
This logic betrays a fallacy familiar to all those who have studied sanctions laws and in particular fails to comprehend the specific logic of oil and gas pricing globally which is not a free market but instead is dominated by what we might call the “energy superpowers” which now does not include Russia but instead principally are the United States and China. It is the governmental policies of these two countries that set global hydrocarbon prices, not spikes in supply and demand or the vicissitudes of oil traders who were long held sinners for the variances in hydrocarbon prices because they would react disproportionately to global events in upping or dropping the price of oil as a result of geopolitical changes. All that has now changed, and it changed as a result of a policy called “energy dominance” quietly developed by the Trump administration in Washington, DC in 2017 and that has remained in place notwithstanding the transition to a Democratic administration since then. It is also likely to remain in place irrespective of who wins the next US Presidential election in 2024.
Sanctions on Russian hydrocarbons, which the conflict in Ukraine has generated, has not in fact reduced the supply of oil and gas worldwide but increased it. How can this be? It is obvious. Russia must fund the war she has engaged in; and her primary resources for sale to fund her conflict are oil and gas. Therefore while Russia is engaged in war she will be pumping and selling more oil and this means that the price of crude oil that she produces must ultimately go down.
How can this happen in circumstances in which the sale of Russian oil and gas are restricted by comprehensive schemes of international sanctions? As sanctions specialists are all well aware, sanctions do not suppress trade in the sanctioned product but simply divert it to those countries that have not imposed the sanctions in question. At the same time they produce massive schemes of legal fraud in which bogus paperwork hiding the origin of the sanctioned commodities is produced which in principle is a deadweight loss but in fact this drives the prices down as well. How can this be so? The answer is because the purchasers of the sanctioned commodity pursuant to the fraudulent paperwork command heavy discounts from the distressed seller - in this case Russia - as a condition of taking their soiled sanctioned product. Hence we find China commanding discounts on global oil market rates of as much as 40% for purchasing sanctioned Russian oil and undergoing the tedium of dealing with the fake paperwork and the complex financial transaction arrangements that need to be put in place to avoid global international banking sanctions. Still international banking, and any sanctions regimes associated with it, are controlled by the West. India comes in a close second in grinding down Russian oil purchase prices on the basis that the Russians have nobody else to sell their hydrocarbons to in significant quantities and therefore they have to sell them to the Chinese and to the Indians in order to continue funding their conflict in Ukraine.
What is China doing with all this excess oil? Here is where a little expertise comes in. She is refining it all. The way you identify sanctioned crude products that Russia produces (but has very limited refining capacity for) is by measuring sulphur content; the way you disguise sulphur content is by refining crude oil into refined products (the things we all want to buy on a daily basis, from diesel to high grade aeroplane fuel to gasoline appropriate for the domestic petrol pump) and you mix crude from different sources through your refinery in order to disguise the origins of any of them. Over the past years China has been engaging in a massive exercise in production of crude oil refinery facilities and now she is using them to buy oil produced by the international pariahs Russia and Iran at deep discounts in each case and then selling the consequent refined products on international markets. This means that the US auto owner ends up with cheaper mixed Russian gasoline at the pumps courtesy of the Chinese.
This policy is caused energy dominance because the United States has developed domestic regulations to collar the price of so-called West Texas Intermediary (a benchmark type of crude oil) by which she can control the price of the other crude oil benchmark, Brent Crude, through applying regulations to control supply and production of crude oil in the United States. In an unholy deal, this WTI collar range of prices is then used by the Chinese and Indians to extort Russian and Iranian oil at a discount and then the Chinese in particular refine and sell the refined product back to the West with a Yuan cap on refined product prices because the Chinese with their vast over-capacity for refinery can control refined product prices.
The net result of the war in Ukraine is that sanctions against Russia have become used as an additional tool in exercising American-Chinese energy dominance policies to stabilise and control the price of oil. Oil sanctions against Russia hurt Russia, of course, but they help the rest of us and they help stabilise the international oil markets. Unfortunately for as long as we keep consuming oil - and there is no evidence that we are going to stop doing that - we are providing funding for Russia to fight a relentless war because Russia has relentless and indefatigable hydrocarbon resources.