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HomeMarketHow the Russian Oil Price Cap Will Change Global Energy Markets

How the Russian Oil Price Cap Will Change Global Energy Markets

The towers of the Linden gas-fired combined heat and power plant, also known as the “Three Warm Brothers,” in Hanover, Germany. A European Union ban on Russian seaborne oil imports went into effect on Monday.

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Krisztian Bocsi/Bloomberg

About the author: Abishur Prakash is a co-founder and geopolitical futurist at Center for Innovating the Future, an advisory firm. He is the author of The World Is Vertical: How Technology Is Remaking Globalization.

After telling its citizens to shower less, Germany is colliding with India as the two countries scramble to secure energy. A company recently nationalized by the German government is refusing to export gas to India, even though New Delhi has a contract in place. Days before the G20 summit in Bali, Indonesia, the situation reached a boiling point, as India debated whether or not to force Germany into a legal settlement.

The global energy crisis has entered a new phase. Existing rules and alliances are in question. A new global battlefield has formed as countries make erratic and potentially dangerous decisions to keep their societies and economies stable.

Start with the G7.

On Monday, a “price cap” on Russian oil went into effect. The U.S., the European Union, and their partners have set a ceiling for the price of Russian oil in the world at $60. (Ukraine was pushing for $30). The goal is to crack the Russian economy. And, it comes as the EU calls for similar action on Russian gas.

Russia has warned that it will not export oil to nations that support the price cap. China and India have voiced criticisms of  the price cap, and early signs are that they will ramp up purchases of Russian oil. Anyone  who buys Russian oil outside of the price cap—say for $65, not $60—cannot use Western insurance or shipping services, the U.S. has warned.

The G7 is effectively weaponizing its financial and logistics sectors in service of its geopolitical goals. Will Russia’s customers create their own alternatives? Could the G7 “price cap” split the world?

Move to West Africa.

As Ghana deals with its worst economic crisis in years, it no longer wants to pay for oil exclusively in U.S. dollars. Instead, it wants to pay with gold, a resource that makes up part of Ghana’s $12 trillion in resources. For Ghana, a slowing economy is an opportunity to establish financial and energy sovereignty. It can trade a resource it has massive amounts of (gold) for another it needs to rapidly develop (oil). 

Ghana’s decision is also a shot across the U.S. bow. Since the end of World War II, the world has used the dollar as the main global currency of trade, especially for energy. How will Washington react to a country with an economy less than 1% of U.S. gross domestic product challenging the dollar’s dominance? 

Jump to the Middle East.

As fans descend on Qatar for the World Cup, China is there chasing  energy. The two countries signed a mammoth $60 billion, 27-year natural gas deal in November. This new energy alliance will last until at least the 2050s. And, the deal was signed after Europe tried and failed to encourage Qatar to ramp up energy exports to European capitals (and away from Asia). 

Saudi Arabia and the United Arab Emirates are adopting an equally bold tone. Not only are the Saudis looking at pricing oil in China’s yuan, Bloomberg reports they are selling energy cheaper to Asia than Europe. At the same time, Russia is asking for some exports to India to be paid in Emirati dirhams, according to Reuters, as the UAE has not banned Russia from transacting in its currency. Have Saudi Arabia and the UAE quietly launched a currency war against the U.S.?

The decisions nations are making about energy is creating a new geopolitical status quo. The pillars that nations have stood on for decades—that energy can be bought freely on global markets using a single currency—are being questioned or discarded. Those changes raise difficult questions about the future “structure” of the world.

First, do the global rules and systems still matter? The German government has effectively voided an energy contract with India, citing unexpected political conditions. If Germany can do this, so can other nations. From Africa to Latin America, countries that have received energy may refuse to pay, while those that have been paid for energy may refuse to export. 

Second, who will enter the energy war next? So far, the fight for energy has revolved around Europe and Asia. But in November, the U.S. removing some sanctions on Venezuela, potentially unlocking new oil supplies. Massive projects are underway in Africa and the Middle East to increase clean-energy supplies. More players are entering an already crowded field. 

Third, is “vertical globalization” accelerating? As “frontier economies,” like Ghana, think about ditching the dollar, while established energy hubs, like Qatar, choose Asia over Europe, the old glue that kept the world together is losing strength. The global economy is fragmenting, and nations of all sizes and cultures are reconsidering their commitments to selling to all customers when it comes to energy.

Finally, what role will businesses play? Nations have been clashing over energy since Russia invaded Ukraine in February. But governments’ decisions are putting businesses in the crosshairs. For example, as the energy crisis worsens, Switzerland is debating a temporary ban on some uses of electric vehicles. Will it be Tesla, Nio, or Mercedes drawn into the energy war next?

A new, postwar future is rising, as the effects of the Ukraine war snowball. Paradigms that were discarded years ago, like hoarding energy, are returning, while Western ideals, like democracies standing together, are being trashed.

With no massive increase to the global energy supply on the horizon, the stage is set for nations to behave in even more unexpected ways.What happens when a nation goes too far and crosses another country’s red line? The risk is that a global energy war will spill over into real violence. It wouldn’t be the first time. 

Guest commentaries like this one are written by authors outside the Barron’s and MarketWatch newsroom. They reflect the perspective and opinions of the authors. Submit commentary proposals and other feedback to ideas@barrons.com.

Credit: marketwatch.com

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