DB,
Let’s assume that this is a reasonable prediction.
First, how does a 3 million barrel a day cut effect Russia
So it looks like a 3 million a day is about 30 percent from February numbers. I am not really sure I am reading this right and the data that I am seeing is highly politicized, so this may be wildly inaccurate. But, play with me because this might be an interesting rabbit hole.
So lets make numbers easy, say Russia is pumping 10 million a day now, and getting 80
percent of the market price as defined by $WTIC (West Texas Intermediate Crude) so roughly 800 million a day in cash. Now reduce that to 7 million barrels a day, increase the price of $WTIC to 190 and Russia discounted price to 170 and you get a 1,100 million a day. Russia’s cash flow jumps almost 40 percent.
Not bad for Russia, at least in the short term. However, this will cause massive demand destruction aa well as open taps world wide. 190 simply will not last. I will not bother with 380 oil.
Adjusted for inflation, oil prices have not been higher than 200 dollars a barrel and they have not sustained 100 plus a barrel for more than 24 months.
So, while Russia can enhance its cash flow by limiting oil exports, this enhancement will be limited to 24 to 30 months and will create demand destruction and higher competitive oil productions elsewhere. In other words, Russia has to wrap this war up by the fall of 2023. Any later than that and they will lose, probably permanently, significant market share.
Looking on this side, what can we expect at 190 dollars a barrel? First, all extraneous motor fuels consumption will be severely restricted. Where I live, twin 300 horsepower out boards still leave the channel daily in search of red snapper. These boats burn an average of
20 gallons an hour and can burn up to 60 gallons of premium gasoline per hour. It is likely that these sport fishing boats will sit idle.
The same will happen with Motor Homes, light aircraft and Sunday drives in the Suburban.
We can expect the value of electric cars and especially electric delivery vans to rise rapidly. The cost/benefit equation for electric stuff at the business level for local transport will become obvious. Battery supplies, which will remain constrained, will be redirected from hot rod electric cars to big brown boxes on wheels.
Finally, ZOOM will be back. After the pandemic, everybody is now acutely aware of how much it
costs to commute. Any business that fails to acknowledge that in their compensation equation will be severely punished. This isn’t just for white collar workers, there are a lot of blue collar workers that have no reason to go to central work location. Businesses that fail
to understand and leverage this will find themselves paying a lot for a little.
To try and show just how sensitive the price of
oil is to supply / demand imbalances I recall that by the mid 70’s it was pointed out that just improving the efficiency of the tankers moving the
oil would have eliminated the oil shortage.
In reality, it does not take a lot to reduce oil demand by 3 million barrels a day. This is less than 10 percent of current world oil consumption. However, it does take time, and during that time the world economy bleeds money in an alarming fashion.
Every oil shock with oil approaching 200 dollars a barrel (inflation adjusted) has left the world economy transformed.
Cheers
Qazulight