Thread by @Big_Orrin

1. The tweet thread written by @AsstSecEcon is naive in the extreme. It is beautiful theory but in reality it is completely impractical.

A thread to explain why

https://twitter.com/asstsececon/status/1565738230154231808

2. The reason China/India have taken more Russian oil is because of the self-sanctioning of OECD/EU oil companies and trading houses. Remember the outcry when Shell bought a steeply discounted cargo at the beginning of March? Shell were forced to pass any profits on to charity

3. Without the self sacrificing of these countries it is likely that Indian/Chinese refiners would not have bought more Russian oil particularly from the Western ports

Without self-sacrificing Russia would have received significantly more money for its oil than it currently does

4. What a price cap does is LEGITIMiZE the purchase of Russian oil. Those OECD/EU oil companies that sacrificed cheap oil will see that it is legitimately fine to start buying Russian oil again as long as they don’t pay more than the price cap.

5. This means that competition for Russian Oil will increase, I.e. the return of the OECD/EU companies plus the new demand from Chinese and Indian companies that did not exist before the war. It means that demand will outstrip supply.

6. In this case price cheating will happen. Why would refiners give up cheap oil when the alternative is likely $30 to $40 above the price cap? Why would they not be willing to pay $10 or $20 more than the price cap to still receive what would be cheap oil?

7. After all, if supply outstrips demand, who distributes or rations the oil? The answer of course is Russia, who will sell to the highest bidder. To overcome the @AsstSecEcon idea of using shipping and insurance is easy. The price cheating refiner will pay the price cap from…..

8. One bank account and show letter of credit to the the necessary authorities while paying the amount above the price cap via another bank/central bank/escrow account/barter trading, etc

It is not difficult and Oil companies are used to paying via different banks for cargoes

9. Russia will end up with more money for its oil while also selling more oil. The 1mbpd estimated loss in production would be removed while companies would restart buying Russian oil products as well.

10. As for inflation. 2 scenarios are likely in play to prevent this. First, is that trading houses would start buying much of the Russian crude oil. History shows they are willing to circumvent rules. Therefore, they would be willing to pay more than price cap and then……

11. Sell Russian oil on at a premium (making huge profits) to other market participants (although still at a discount to the alternatives). This would mean little drop in oil prices for refineries buying it. Remember the trading houses have very good relations in Russia

12. The second scenario is OPEC Gulf countries buying cheap Russian crude for their oil refineries. Russian crude is similar in quality to Gulf grades. It would mean that they could export more of their own crude which would be sold at market prices not at the price cap.

13. This would mean more profit for those countries. But it also means they could Cut production without making a loss. Example, if Saudi Arabia bought 1mbpd of Russian Crude oil with a market cap of $60. Saudí could protect $100 oil prices by only exporting 600kbpd to cover cost

13. That would be a 400kbpd cut in oil production/exports without losing a dime and therefore putting a floor under oil prices for the 10mbpd it sells. Saudi has already threatened to cut production to maintain high oil prices

14. what the @AsstSecEcon forgets is that Russian oil is only 10% of the market. The other 90% is sold at market price and is not discounted Therefore, the effect on inflation is going to be little while it is also likely to see Russia get more money for its oil overall.

15. The oil market has a history of circumventing the rules. Just look at sanctions on Iran and Venezuela. They still export crude oil. Therefore there is no history to show the oil industry will adhere to the price cap rules because it won’t. Especially when the alternative……

16. Will be significantly more expensive.