Sanctions aid glut in commodities
Under the leadership of the USA and European Union, many nations imposed financial sanctions on Russia after its attack on Ukraine. Western Power put a price cap of $60 per barrel on Russian crude.
Price cap and sanctions turned into a blessing for oil starved nations like India. World’s most populated country consumes around 4.5 million barrels per day (mbd) and imports 88% of its oil requirement. India ignored west imposed sanctions and imported oil from Russia at a discount to international rate. Similarly, China that imports 65% of its oil requirement also ignored sanctions.
Cumulatively, India and China account for 20% of global crude oil consumption. As per Reuters, Russian crude oil exports stood at 4.76 mbd in 2023 and as per Centre for Research on Energy and Clean Air (CREA), from 5 December 2022 (when price cap came into force), until the end of July 2024, China bought 47% of Russia’s crude exports equivalent to 2.2 mbd while India imported 37% or 1.8 mbd crude.
The combined crude import of 4 mbd by India and China came to approx.4% of global production (102 mbd). As per CREA, Russia’s crude production cost averages $15 per barrel. Large Russian imports by these two nations at a discount to international price is putting pressure on high cost producers like Brazil, Mexico, Venezuela, Nigeria etc. Thus, these nations are producing more oil to meet their nation’s budgetary requirements, making a supply glut at international level.
According to ‘Wheel of Fortune’, a magnificent book by Thane Gustafson, Oil and Gas together represented 20% of Russian Federal tax revenue in 2001 that zoomed to 37% in 2007 (at the peak of the Super Commodity Cycle). As per Oxford Institute for Energy Studies, in 2022, when sanctions were imposed, total Russian budget revenue amounted to $407 billion that included $170 billion from oil and gas or equivalent to 42% of total tax collection, highlighting the growing dependence of Russia on Oil and Gas sector.
The Russian Government is addicted to Oil & Gas revenue. In 1987 Russia produced 11.5 mbd crude, almost 1 mbd more than its 10.6 mbd production in 2023- hinting enough scope for scaling up the production. So when push comes to shove, Russia will not think twice before flooding the global market with cheap oil.
Moreover, Russia is a mineral economy. In 2021 before War erupted, Russia supplied 43% of global Palladium, 14% of Platinum, 11% of Nickel, 6% of Aluminium, and coupled with Ukraine it accounted for over 40% of global Neon production. Russia is the largest natural gas producer, second largest aluminium exporter and third largest coal producer. Russia will leave no stone unturned to protect its revenue from mineral exports. Assurance of cheap supplies from Russia is keeping commodities at a lower level.