I don’t see why non-Western countries would pay the full price for Russian oil when Russians have nobody else to sell their oil to. The power of negotiation is with countries like India, China and Turkey when it comes to buying Russian oil, as they can buy from anybody, while Russia can only sell to them.
For the sake of simplicity, assume there are two sellers and five buyers of the product, namely oil in this case. The sellers are the ones who basically set the price of the product by setting the production targets according to their (global) economic forecasts and other factors (being political influence, control of competition, etc), while being limited by the production capacity. The demand for the product is more or less inelastic; in other words, the demand is not greatly affected by the price of the product (within a reasonable range). In the world where everything is fine, the 5 buyers import the product from the 2 sellers. One of the buyers is very dependent on the supplies from one of the sellers, which probably isn’t relevant to the discussion. Something happened and the world is no longer fine. Two of the five buyers in this new “not fine” world refuse to import the product from one of the sellers and try to increase their purchases from the other seller. The problem arises where all 100 units of the product offered to the world (the five buyers) have been all allocated to certain buyers and have always sold and there is no excess supply (one of the reasons being, as mentioned above, the producers set these production targets).
Now there is a dilemma because this market has been set up for quite a while with rules and delivery routes well established. The seller that is now being “shunned” exports about 13 of the 100 units available for global imports. In the short term, this is a big issue due to the established supply routes, contracts, etc. One of the two “shunning” parties now has to somehow get a significant chunk of the remaining 87 units of the product from the other seller. However, all of these 87 units are always allocated among all participants in the market (including this now desperate party itself). So the only way to capture a larger share of the 87 units available is via paying a higher premium and/or negotiating new contracts. The other “shunning” party, in the meantime, keeps dumping the precious product out to the market from their own strategic reserves (in unprecedented quantities) because, by their standards, they are suffocating the consumer at the pump. This, in turn, helps the other buyer(s) as well; however, the sellers say they are going to cut production as a result.
At this point, everyone understands that nothing is easy, yet the product is in demand no matter what, as long the world keeps rolling (the dream of eliminating dependance on fossil fuels is almost as far as (or even further than) it was when the world was “fine”), so both sellers will be able to sell it at market prices (they themselves set) once the new means of delivery are found. The two “shunning” buyers also realize that they basically control the financial market to a great(est) degree and that market includes insurance. They also realize that the established delivery ways via pipelines, which are the cheapest, most efficient, safest, environmentally friendly, and reliable, are no longer an option for a good chunk of the “shunned” seller’s output and that sea is the only viable alternative. This option would require sea vessels being insured by the buyers’ financial industry. Since this post is already way longer than it should be, long story short, the two “shunning” buyers set the “price ceiling” for the “shunned” seller’s product in order for the delivery means to be insured.
Here we arrive at another dilemma. Now from the “shunned” seller’s perspective. The seller cannot just stop production, so they simply dump their output to the willing buyers at huge discounts. Whatever means necessary, so to speak. The transportation costs are pretty insane and some companies made big bank on those deliveries. On the receiving end, the refineries made bank as well because they basically refined the raw product from the “shunned” seller and sold it to the “shunning” buyers, who paid a premium for the same product. However, the premium went to the pockets of the other buyers now and not the “shunned” seller. The fact that at least one of the greatest beneficiaries of the situation is the evil competitor and (now declared) adversary is not necessarily relevant in the eyes of the “shunners”. It is also not necessarily relevant that the same amount of oil is now being pushed around the world in the least safe manner with ridiculous environmental impact. The scheme, however, does so far proves to be meeting the goals of the “shunners”: while still using Russian hydrocarbons they pay more for, Russia is the one benefiting less from selling them.
Time, of course, doesn’t just pass by. Russia is looking to build and buy any tankers they can (some in questionable shape, raising even more environmental concerns). Others are looking to make profit. Russia is also implementing laws in place that the oil is not to be sold below a certain discount, which is still substantial, but the goal is to minimize it and eliminate in time. Everyone also knows that the product will sell regardless because there is no alternative. While there is a buck to be made, those who can make it will pay more as long as there is that buck to be made, which is economics 101: in other words, as long as there is any discount on the product with limited supply that can be processed (or simply mixed with other product from a different seller) and sold for profit, there will be buyers for that product. The same is true for shipping: as long there are substantial profits to be made, there will be more of those willing to get their chunk entering the market (until there are enough players and the profit is no longer attractive or worth the hassle) or some start providing discounts on shipping (until there is profit that is no longer attractive or worth the hassle or no profit at all). This is where the greatest “discount” will come from until the market stabilizes and finds ways to work more efficiently again.
In essence, we currently have about the same amount of oil moving around the world with much higher environmental risks and impact, which we have been promising to reduce for years. We also have some (much?) of the same oil being indirectly purchased by the same buyers (the “shunners”) who now pay more for it than they would otherwise, but a small chunk of profit is (temporarily) being distributed between additional beneficiaries, some of whom we declare to be our adversaries.
Another note to keep in mind, currently all of the comparisons are made to the previous period, the period of record revenues and profits by the entire oil and gas industry and Russia in particular. Here is a comparison to the period before that, which instead was on the lower end (borrowed from a Reuters
article):
Here is another interesting graphic from
Statista for 2020:
We can kick it back and forth all we want, but there is always only x amount of oil available on the market and x (not y) amount of oil is consumed in the same market, with some temporary deviations from this rule. And this is the key point to this whole discussion. Once the market “reorganization” is complete, there will be the so-called efficiency again, with standard delivery routes and price setting that will not be dictated by some arbitrary price caps set by some of the participants of this market. Some may choose to buy from certain producers and ignore others, but other players won’t because of the increased costs of, really, the most important resource for economic development/prosperity and that resource being energy.
Of course, we should not forget that the American strategic reserves that were carelessly, in my opinion, dumped need to be refilled. The plan to start refilling them was set to begin at about $70 per barrel, which the Saudis and others so far said a hard and firm no to.
And lastly, none of the big (or little?) boys in the oil industry, Canada, Norway, and the USA itself aside, supported the western ideas about how to deal with the war in Ukraine. Or even accepted the origins and premise of the invasion as we publicly interpret them to be to begin with.