Ben Cahill: “The Russian crude oil price cap is meeting its goals"

Ben Cahill is Senior Fellow in the Energy Security and Climate Change Program at the Center for Strategic and International Studies (CSIS), based in Washington, DC. In this conversation with the Director of EsadeGeo, Angel Saz-Carranza, they discuss the most pressing issues on the global energy market, including the effects of the sanctions on Russian crude oil and petroleum products, the role of OPEC, the economic recovery of China, and the investment strategies of major oil companies. 

In this article, we offer an edited version of the interview, which you can listen to in full here. 

How have the Russian war on Ukraine and the responses by the EU and G7 — oil embargo and oil cap — affected the global oil market?  

If you add crude and petroleum products, Russia is traditionally the world's largest oil exporter. We're talking about an effort to cut Russia from its premium export market, which is a significant shift. And yet the market has adjusted well; there's been a reordering of crude flows worldwide. Russia reoriented all of its exports from Europe to other regions. That worked out well and there hasn't been a big disruption to their oil production or exports. Instead, we've seen that Europe is importing more from the United States, West Africa, North Africa, Middle East and some from Asia. So the global flows are changing, but the price impact hasn't been very dramatic. The transition has been smooth. The EU embargo and the oil price cap ultimately had two goals: to keep the market well-supplied and to deprive Russia of revenue. In those terms, it worked. But the actual implementation of these things is not as strong as many believe.  

There's been a reordering of crude flows worldwide

Have the embargo and the price cap really affected Russia in revenue terms?  

They have definitely affected Russian oil export revenues, but not as much as the headline figures suggest. For example, you often hear Russian oil selling at a $30-35 barrel discount, and if you look at the data, comparing Brent and Urals crude oil price, it is about a $30 spread. But Russia is earning quite a bit more than that because much of this trade has gone dark, outside the reach of the EU and the G7. To determine the actual revenue, you can look at the customs data from India and China. They paid not $30-35 below the global benchmark but more like $10-15. So it's still a revenue impact for Russia, but smaller than some policymakers would hope.  

The American oil market has not responded aggressively to the price increase. Is shale oil leaving aside its role as a swing producer?  

The United States was never a swing oil producer. But you're right; something has changed in the shale oil industry. The US has downshifted into a slower, more sustainable rate of growth. The reason is that over the first decade of the shale boom in the US, we had incredible increases in oil production that provided a lot of revenue for states, created a lot of jobs, it was good for the trade balance... But from an investor standpoint, it was not a happy story. Shale companies in the United States outspend their cash flow yearly; it was the worst-performing industry in the S&P 500. After the price crash with Covid-19 in 2020, investors said enough. It forced the industry to shift towards capital discipline. That was a winning formula for investors, but it means the sector is growing slower than it did. And the significance to the global oil market is that we no longer have this sort of unlimited new supply coming from the US. We don't have that security blanket in the global oil market, which is a cause for concern if the market tightens.  

Much of Russia's oil trade has gone dark

The other place where we can look for spare capacity is OPEC. So what's new about it?  

The spare capacity in OPEC and OPEC+ has fallen in recent years. Most of the countries in OPEC+ produce what they can flat out every month, and they don't even meet their production target. Countries like Nigeria, Angola, Kazakhstan or Malaysia typically underperform their reference production target. As for OPEC, production is concentrated in just two countries: Saudi Arabia and the UAE. You also have a little bit in Kuwait and Iraq, and that's it — everyone else is producing what they can every month. You can't compensate for a war when you have periods of low spare capacity. Saudi Arabia and the UAE indeed are both investing in growth, but we won't see the results until mostly 2026 and 2027. Until then, we have a tight market, and I don't think OPEC has much extra capacity. In fact, I think OPEC is happy with higher prices.  

This is happening while China has relatively low growth, but now it seems to be picking up. So what can happen in the next year as China revs up its economy? 

We will indeed see a rebound in economic growth in China this year. The question is how much and if it will look different from the past. China downshifted to a lower economic growth rate than it had in the 2000s' when the GDP growth averaged 10% per year. Now the Chinese government is targeting 5% GDP growth and the nature of the economic activity in China is changing, too. For many years, China massively overspent on infrastructure and real estate. Now the government is trying to limit investment in those areas, which means economic growth is becoming less dependent on commodities. So they'll have strong growth, but it will disappoint some people in the market.  

We're underinvesting how much oil we'll need for a long time

The oil and gas industry seems to not be investing sufficiently to meet the needs as we go through the energy transition. Why is this happening?  

Funding a long-term oil and gas investment product is extremely difficult these days. Exploration is a long-time game and companies have started to shift away from complex, expensive megaprojects. Instead, more capital has been put into short-cycle oil. There are real concerns about whether we are underinvesting according to the evolution of our demand over the medium and long term. Spending has rebounded in a big way. Last year, it rose by about 40% over the previous year (from a very low base because of Covid), but it's probably not enough. It's good that the super majors are spending more money on low-carbon energy and energy transition — their shareholders are pressuring them to do this, and it's very rational to do it. But industrywide, we're probably underinvesting how much we will need for a long time. Currently, about 80% of primary energy demand comes from fossil fuels. And you can't change a system like that overnight. So there is a complex challenge of continuing to invest in the oil and gas sector, even as you try to accelerate the transition.  

EU oil majors are trying to diversify to renewables, but we haven't seen that among American companies. What is the vision that oil and gas companies have of themselves in the future? 

You're right; they are taking different paths. Companies like TotalEnergies or Shell want to move into low-carbon energy, offshore wind, batteries and battery storage; they want to be electricity providers. In Europe, they have different shareholder and investor pressures, so investors may reward companies for taking different paths as long as they can execute and be profitable. As for the big American oil and gas companies, they are not doing that. A company like Chevron thinks they don't have a competitive advantage in offshore wind or solar, so they try to be more selective in what they do for low-carbon energy — they try to carry on with oil and gas production and investment while driving down its emissions and decarbonizing operations. ExxonMobil is generally following the same path. A challenge for the industry is that producing oil and gas is not like producing electricity. It's a different model with a different rate of historical returns. They might be able to evolve and do great in being diversified energy providers and electricity companies, but it's still a big challenge in terms of human capacity spending and meeting investor demands and expectations.