The European ban on Russian oil combined with the “ceiling” for the price of Russian barrels has done away with the global oil market. Instead, a fragmented market appeared, the boundaries of which are determined not only by economics and logistics, but also by geopolitical strategy..

Western governments have created this new market in an attempt to reduce the oil revenues that fuel Vladimir Putin's war machine.. Moscow will counterattack in hopes of triggering supply cuts and panic that will break support for Ukraine. But Russia faces much bigger challenges than expected given current market conditions, writes Daniel Yergin, vice chairman of S\u0026P Global, in an article for the Wall Street Journal..

He explains that the oil market truly became global about three decades ago after the collapse of the USSR and the obstacles created by the Bolshevik coup a century ago.. This coincided with the economic rise of China, which has gone from an energy self-sufficient but poor country to the world's largest oil importer.. Although there were certain restrictions on the global market, in particular, there were sanctions against Iran and Venezuela, economic efficiency largely determined how barrels flowed from one corner of the planet to another.. That's how it's been until now.

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In the months following the start of Putin's invasion of Ukraine, the EU and UK announced they would ban Russian oil imports from December 5. They also agreed to ban companies from insuring and providing transport " This meant that Moscow was cut off from its largest market, to which it shipped almost four million barrels a day.. And many tankers of the world will no longer carry Russian oil.

The US was alarmed by Europe's decision, fearing it would lead to global shortages and price hikes.. Therefore, the Joe Biden administration proposed a new idea - to establish a " This approach allows to save the flow of Russian oil, but at the same time, the Kremlin's export revenues are reduced.. After tense negotiations, the US, EU and G7 agreed that the maximum price per Russian barrel should not exceed $60. This country indicator will be reviewed from time to time.. As long as Russian oil costs less than $60, traders can trade it, brokers can insure it, and tankers can transport it. The details of the installed " All players along the pricing chain, from the original purchaser to the transporters, must “verify” that they are not over the limit.. Punishments for this range from public shaming to fines and sanctions..

So far, this policy is working due to the slowdown in the global economy, which led to the easing of fuel prices, as well as the fear of market players about the unknown consequences for violating the " Now a barrel of Russian oil costs just over $40, which is 45% below the established limit and 33% less than the Russian state budget for 2023 requires, which includes a price of $70.. Such a sharp drop in prices is good news for countries like India, which imports 85% of the volumes it needs.. New Delhi, once a minor importer of Russian oil, has now become China's main competitor in the fight for Russian barrels, although it buys them at a deep discount..

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Weak global growth will continue to underpin the effectiveness of the price ceiling, keeping the market glut and keeping prices low. But that could change once global demand picks up.. For example, if China abandons its COVID-19 policy. But such a rebound is still far away.. The next challenge will come in February, when the price cap will be extended to oil products from Russia..

Putin, who has denounced the price cap for Russian oil as " The Kremlin has created a " Chinese and Indian companies can provide marine insurance, but this will still not be enough.

The most powerful weapon in Putin's arsenal right now is production cuts.. He has already applied this strategy in the natural gas market, causing trouble in Europe.. During a speech in October, Putin quoted American economist Milton Friedman.

“If you want to create a shortage of tomatoes, set a price control. And you'll be short of tomatoes. The same applies to oil and gas,” Putin said, noting that Fridman “cannot be called a Russian agent of influence.”.

Later, he repeated his threat to cut production, and this week he may impose a ban on the sale of oil to countries that adhere to the price " Putin tries to persuade OPEC+ to cut production. But so far he hasn't succeeded.. For its part, Russia could still cut exports by a million or more barrels, hoping to strain the market and push prices up..

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The Kremlin may hope that higher prices will offset the decline in exports. Its goal may be to create scarcity, additional economic pain, and a nervous search for alternative sources.. And all in order to set against each other the countries of the coalition that supports Ukraine in the war. That was Putin's recipe for the European gas market, in which he hoped to succeed this winter by disrupting supplies..

However, Yergin notes that the oil market is different from the gas market and has an additional constraint that Moscow has to reckon with.. The sharp decline in oil supplies and the associated rise in prices will deal a blow not only to Europe, but also to countries important to Russia, including India and China, which accounted for 70% of Russian oil exports via sea routes in December. The reduction of Russian production will require more intensive cooperation between countries and companies in the West. But they will be able to neutralize the consequences by releasing additional barrels to the market from the strategic reserves of the United States and its allies.. But even that may not be useful, given the current decline in oil demand..

Yergin thinks production cuts could add to Kremlin's long list of miscalculations. By doing this, he will expect that higher prices will compensate for the decrease in volumes.. But after the initial increase, Russia will eventually find that prices have not had the desired effect and have not compensated for lost production.. As a result, the country's oil revenues will further decline.. And Russia will be to blame for this.