Understanding Oil Prices in a Globalised Market

The ordinary person on the street, regardless of their country, does not fully understand how business operates. While they may grasp the basics of their local market, like how their local fishmonger operates, they often lack the knowledge to comprehend the complex dynamics that drive global commodities, such as oil and gas.

The intricacies of how corporations, conglomerates, and international companies conduct business can be incredibly intimidating. Explaining these concepts can often lead to a disinterested audience, who quickly veer the conversation to more relatable topics, such as soap operas or football matches.

The Global Oil/Gas Market and Cartels

Oil and gas is a global business, with core prices determined by the various cartels formed by oil companies. These cartels set a 'medium' price per barrel, which includes most of the production costs involved in bringing the product to the point of sale, such as at the gas station.

Some suppliers artificially fix their prices at different per barrel rates. Prior to the invasion of Ukraine, this strategy was employed by Russia to enticed the EU to become addicted to its oil and gas, which Putin controls. This strategy has been a long-term plan to rejuvenate the Soviet Union, giving Putin leverage over Europe.

The Current Economic Impact of Sanctions and Putin's Pricing Strategy

Russia's disruption of deliveries to the EU has resulted in a global economic crisis, reducing available funding for Ukraine. Putin's goal was to sell petroleum at a lower price to entice the EU, but now that supplies have been cut off, Russia is forced to offer even bigger discounts to attract new customers. This strategic move places Russia in a defensive position, putting it at a begging market.

Russia's Disruption and Economic Consequences

The irony is that Putin's unilateral decision to cut off deliveries to Europe has put Russia in a difficult position. Russia is now selling petroleum at steep discounts to Asia, which is putting them in direct competition with OPEC producers. While OPEC is selling to the West at high prices, Russia is facing significant losses due to sanctions. This has led to a drop in oil prices for Russia, and they have lost all market leverage.

The situation is further complicated by OPEC's efforts to retain their position in the Asian market. This economic dynamic is likely to escalate into a price war, with potentially devastating consequences for Russia. The historical precedent of the collapse of the USSR in the 1990s, due to falling oil prices, serves as a warning for Russia's current situation. Without adaptability and effective economic strategies, Russia risks following the same trajectory.

Conclusion and Future Outlook

The current oil prices and the geopolitical developments in Russia highlight the complex interplay of global economics and political strategy. While the ordinary person may struggle to understand these intricate dynamics, the implications for Russia are clear: without a strategic and adaptive approach, the Russian Federation may face significant economic challenges in the near future.

For those interested in learning more about oil prices, global supply, and economic strategies, ongoing developments in the global market provide rich ground for analysis and discussion.