Western governments' extraordinary interventions in oil markets over the past year — US and EU bans on Russian imports and G7 price caps on Russian exports to emerging economies — may have achieved policy makers' near-term goals, but those actions could lead to future disruptions, market participants say.
The parallel push by the US and EU to leapfrog ahead of global competitors on renewable energy technologies and manufacturing and to secure supply chains for critical minerals could make fragmentation a permanent feature of energy markets. And many emerging economies feel singled out by geopolitical conflict over both current and future energy needs.
Market participants speaking at this week's CERAWeek by S&P Global in Houston grudgingly conceded that trading restrictions on Russian oil have worked better than expected, but warned of rising market inefficiencies and risk of disruption. Energy markets normally operate as a "big, just-in-time delivery machine" with relatively low swing production capacity and inventories", Chevron chief executive Mike Wirth said during the conference. "What concerns me is we've introduced new rigidities into these systems," he said. In 2019, a drone attack on Saudi Arabia's 5.7mn b/d Abqaiq crude processing plant had little effect on markets, but "an unexpected event today could create a different outcome", Wirth said.
TotalEnergies chief executive Patrick Pouyanne bemoaned resulting dislocations in what used to be a global market and noted that the price caps will be difficult to remove, leading to the creation of "grey or even black" market tiers. Trading house Trafigura's co-head of oil trading Ben Luckock likewise noted a lower level of transparency, citing the "bunch of [trading] companies often set up in places like the UAE", and the rising tanker market share of the so-called "shadow fleet" — a reference to older, smaller tankers that Russia and other producers facing US sanctions are now using to transport oil, heightening safety and insurance risks.
Refined products are being shipped longer distances as the market adapts to the EU ban on Russian products that took effect last month, testing the capacity of the global freight system until more ships are built, Wirth said. In the meantime, "the proportion of the entire global shipping fleet drifting in the shadow service is significant", Luckock said, estimating the number of tankers in the shadow fleet at 650. Trading firm Gunvor's chief executive Torbjorn Tornqvist pegs the number of those vessels at 300-400.
The long lead time between the announcement and implementation of the EU import ban and G7 price caps allowed European buyers to build inventories, so the effects of measures targeting Russian diesel exports may take another six months to become evident, Wirth said. US and G7 policy makers received praise for extensive consultations with the industry. "Implementation of the price cap is actually going OK," Luckock said. "Price capping itself is not a huge deal. It's not that difficult for people to comply." Tornqvist agreed, noting that the price caps have "been working as intended, meaning that Russian oil is flowing, but at a lower price".
Keep up the good work?
Whether that can continue is a different question. Despite protests, Moscow has so far effectively co-operated with externally imposed restrictions on exports of its main revenue-earning commodity. The planned 500,000 b/d cut in Russian output, billed by Moscow as a response to the crude price cap, is more likely a reaction to Russia's inability to find new markets for its refined products, Luckock said. The larger issue is that "energy coming out of Russia is something the western world doesn't get to live without", Luckock said, adding that the extended oil supply chain logistics will create more problems the longer they last.
Global oil demand continues to recover post-pandemic, but lingering signs of economic weakness in Europe and the US remain a cause for concern, Opec secretary-general Haitham al-Ghais said at CERAWeek. But growth prospects in key Asian demand centres such as China are good, al-Ghais said. China's growth is still a key factor — Beijing's recent actions indicate that its oil demand recovery expectations may be too high, Gunvor research and analysis head Frederic Lasserre said. But Luckock argues that strong demand growth in China is sustainable.
China's economic recovery also presents risks for Europe's efforts to diversify away from Russian gas, Shell chief executive Wael Sawan warned. LNG available on the spot market because of lacklustre demand from China and mild weather have helped Europe get through this winter, but the continent must shore up its energy supplies for next winter, Sawan said. "We need to move away from depending on luck as a strategy for our energy needs in Europe," he said.
Concerns over China are already prompting western governments to react — but on the energy transition front. The White House decarbonisation strategy involves heavy investments in US-based electric vehicle and battery manufacturing, and establishing trade alliances with select foreign producers of critical minerals to reduce dependence on China. The EU is playing catch-up on renewable subsidies and critical mineral sourcing requirements, in part as a response to what it sees as uncompetitive US actions.
The US Inflation Reduction Act will reach deeper into emerging businesses and economies than a European nest of tax policies, global asset manager Carlyle Group's chairman of energy, Marcel van Poecke, said. "I think the Inflation Reduction Act will force Europe to step up with energy transition support," he said.
Anglo-Saxon transition
The US approach of providing financial incentives for decarbonisation is preferable to carbon-based trade restrictions, Malaysian state-owned Petronas chief executive Tengku Muhammad Taufik said. But he warned against viewing energy transition timeline and requirements "through a purely Anglo-Saxon lens". Emerging economies in Asia are not well positioned to adopt US-style green subsidies or respond to the EU's carbon border adjustment mechanism, Taufik said.
Emerging markets broadly stand to benefit from disruption to the incumbent energy mix, Spanish bank BBVA chair Carlos Tores said — "They have immense potential and I believe they are going to be overall clear winners." That is especially true of Mexico, Tores said, as US spending will benefit Mexico's integrated supply chain and ample lithium resources.
CERAWeek panels provided some insight on the ongoing and future debates on energy transition between the global "north and south". Emerging economies' calls for extended transition timelines are too often written off as climate denialism, Taufik said. Developed countries that oppose developing countries exploiting their own resources essentially want to limit competition, nascent oil producer Guyana's vice-president Bharrat Jagdeo said.
The biggest challenge to advancing global decarbonisation goals is lack of funding, US presidential climate envoy John Kerry conceded. "I swear to God, if you put money on the table, this is doable," Kerry said of the UN climate goals. The US administration is hoping to redirect funding from multilateral developmental banks to fill the multi-trillion dollar gap in funding for decarbonisation, a subject Kerry discussed last week with chief executive of UAE state-owned Adnoc Sultan al-Jaber, who has been appointed president-designate of the UN Cop 28 climate summit. The UAE presidency of Cop 28 aims to "build bridges between north and south, private sector, governments and all stakeholders", al Jaber said at CERAWeek.
