The Economist - USA (2022-03-12)

58 Finance & economics TheEconomistMarch12th 2022

Supply, which is easy to cut but takes lon­

ger  to  ramp  up,  had  not  caught  up,  says

Giovanni  Serio  of  Vitol,  a  big  oil­trading

firm. Many “midstream” facilities that had

shut during covid­19, such as oil refineries,

remained offline, creating bottlenecks. 

The second reason for worry is vanish­

ing  supply,  which  has  been  the  main  pro­

blem  since  the  invasion  of  Ukraine.  Some

Russian oil is still flowing out: millions of

barrels are currently crossing the Atlantic.

But  most  of  it  was  bought  and  paid  for  a

fortnight ago or longer. Fresher supplies of

Urals crude, the variety Russia pumps, are

no longer moving—despite 25% price dis­

counts.  Western  firms,  loth  to  find  them­

selves stuck with unsaleable cargo, are pre­

empting  possible  sanctions.  Many  also

fear a public backlash: on March 8th Shell

said it would stop buying Russian oil after

days of negative press coverage following a

purchase of Urals crude.

Particularly  problematic  is  the  lack  of

financing.  Most  foreign  banks,  even  Chi­

nese  ones,  have  stopped  issuing  letters  of

credit for Russian trades. After a decade of

paying steep fines for breaching sanctions

against  Iran  and  other  pariahs,  banks  are

taking  no  chances.  Increasingly  that  also

applies to big commodity traders like Glen­

core,  which  not  that  long  ago  still  dealt

with autocrats in the name of powering the

planet  (and  pocketing  profits).  Many  fear

being cut off from bank funding, their life­

line, if they continue to deal with Russia.

Problems with logistics are no less im­

portant.  Unable  to  get  insurance,  foreign

ships are avoiding the Black Sea. Last week

Maersk  and  msc,  which  together  account

for a third of container operations in Rus­

sia,  pulled  away  from  the  country.  Britain

has  banned  Russian  ships  from  its  ports;

the euis mulling similar measures. France

has  intercepted  Russian  ships  carrying

steel and soya bound for other countries.

Idle cargo and erratic prices are strain­

ing  the  physical  and  financial  infrastruc­

ture  of  commodity  trading.  Some  Euro­

pean ports are severely congested. Wrong­

footed  traders  are  facing  hefty  margin

calls.  On  March  7th  China  Construction

Bank, a big lender, missed a payment at the

lme (it  has  since  made  it).  Bunker­fuel

prices have risen by a third since the inva­

sion, constraining shipping worldwide. 

A proper oil embargo by the West could

make  all  that  look  like  a  pleasant  punt  on

the  Cam.  In  normal  years  Russia  exports

7m­8m barrels per day (bpd), half of which

go  to  the  eu.  In  theory  China  could  buy

more  from  Russia,  freeing  up  some  other

supply.  But  Rystad  Energy,  a  consultancy,

estimates that Russia’s pipelines could re­

route  just  500,000  bpd  from  Europe  to

Asia,  with  rail  adding  another  200,000

bpd. Ferrying Russian oil to Europe takes 5­

10 days; shipping it to Asia takes 45. Redi­

recting flows would get even harder if “sec­

ondary”  sanctions  target  non­Western

firms. With Western payment systems out

of  bounds,  traders  would  turn  to  clunky

bartering. Better alternatives, used by Chi­

na or others, could take years to scale up.

This suggests a fair chunk of Russia’s oil

supply  could  exit  the  market.  Other  com­

modities would probably be affected. Rus­

sia has pledged to respond to a full­blown

oil embargo by curtailing gas exports to the

West.  Limits  on  coal  sales  would  also  be

painful, and would complicate Europe’s ef­

fort to shift away from gas. As the quality of

its own supply has deteriorated, the share

of  the  bloc’s  imports  of  coal  coming  from

Russia has doubled over the past ten years,

to  80%.  In  the  case  of  both  gas  and  coal,

much of Russia's supply would simply not

get to market. Its gas­storage facilities are

almost  full.  It  does  not  have  a  big  enough

fleet to ship coal to Asia, where it is most in

demand (it sends coal to Europe by rail).

Call the cartel

The big question is whether an increase in

supply  from  elsewhere  could  mitigate

such losses. Start with oil. America has al­

ready  scheduled  an  increase  in  oil  output

of 1m bpd. The West could also press mem­

bers  of  the  Organisation  of  the  Petroleum

Exporting  Countries  (opec)  to  increase

supply,  yielding  perhaps  another  2m  bpd.

Lifting sanctions on Iran may add another

1m  bpd.  Tapping  emergency  stocks  would

help, too. Last week America and other big

oil­consuming countries agreed to release

60m  barrels  from  their  stash.  Hints  have

been given that they could release more. 

All  this  may  increase  global  supply  by

3m­4m  bpd—a  lot,  but  perhaps  not

enough.  And  the  extra  supply  would  take

too  long  to  arrive.  opecmembers  cannot

crank  up  production  fast,  because  they

have  not  invested  in  new  fields  for  years.

Restarting  American  shale  wells  takes  six

months;  delivering  crude  from  them  an­

other  six.  In  the  interim,  prices  would  re­

main excruciatingly high. And there would

be  other  problems.  Retrofitting  refineries

meant  to  guzzle  Urals  crude,  which  has  a

highsulphurcontent,ishard.Lebanonhas

justrunoutofdieselnotforwantofoilbut

capacitytoprocessnon­Uralsgrades.

FindingnewgassuppliesisEurope’s

bigproblem.Asspringcomestheconti­

nentwillneedlessofit,andpost­winter

restockingcouldbedelayeduntiltheau­

tumn.Meanwhile,Europecouldstartim­

porting moreliquefied naturalgasfrom

America,thoughthatwouldrequireEu­

ropetocrankupits“regasification”capac­

ity(forconvertingliquefiedgasbackinto

gaseousstate).Scheduledsummermainte­

nanceonNorwegianrigs couldbepost­

ponedsotheycontinuetoproduce.Azer­

baijancouldpipemore toEurope.Alto­

gethersuchfixescouldreplaceabout60%

of Russian imports, Rystad reckons. A

strongeffort—butstillinsufficient.

Rebalancingthemarketthusseemsim­

possiblewithouta forcedreductioninde­

mand.Theleastbrutalwaytoachievethis

wouldbethroughpoliciesseekingtolimit

consumption,suchascapsontheheating

ofbuildingsortherationingofpowerfor

industrialuse.Morelikelythemarketwill

adjust to soaring prices the hard way,

throughwhateconomistscall“demandde­

struction”:self­imposedcuts.MrSerioof

Vitolsaysa jumpincrudepricesto$200a

barrelcouldinduce“voluntary”cutsof2m

bpd,withanother2mbpdnotconsumed

asincomesare squeezed.OnMarch9th

Rystadsaidpricescouldreach$240a bar­

relthissummerifmorecountriesjointhe

Americanembargo.

Suchenergyhellwouldtakea hugetoll

onfirmsandpeople.Demanddestruction

inmetalswouldaddtothepain.Alumini­

umshortagescouldhamperthemakingof

anythingfromcarstocans.A nickelscarci­

tycouldhaltelectric­vehicleproduction.

Allthiswillsurelyhobblerichecono­

mies.JPMorganChase,a bank,alreadyex­

pectstheworldeconomytogrowby0.8

percentagepointslessin 2022 thanitdida

weekbeforetheinvasion,withtheeuro

zonetakinga hitof2.1percentagepoints.

For poorer countries the immediate

threatisthatofwallopingcurrent­account

Off balance

Current-account balance, % of GDP

Sources:IEA;IMF;TheEconomist



Greece

Belarus

India

Tu r ke y

China

SouthAfrica

SouthKorea

-10-15 -5 50

01 Balance with oil at $150 per barrel

Dear, dear

Commodity prices, January 1st 2022=100

Source:Bloomberg

*Dutch TTF spot price

†Brent crude ‡Newcastle

1

300

250

200

150

100

50

Jan Feb Mar

Coal‡

Nickel

Aluminium

Oil†

Natural gas* Russia invades

Ukraine