The sanctions are still too timid. E.g. there has been no response to Russia jamming GPS signals over the Baltic area. The appropriate response would be to announce that any airline flying through Russian airspace would be banned from North American and European airspace. That would stop all major non-Western airlines from flying to Russia or even flying over Russia between East Asia and Europe (giving them competitive advantage over European and Japanese airlines flying longer routes to avoid Russia). Furthermore, a warning could be issued that if Russia does not cease and desist, airlines holding a stake in sanctioned airlines would be sanctioned too (and then airlines having codesharing agreements with them), potentially with further escalation to ban US banks from dealing with any sanctioned airline and (ultimately) any bank dealing with a sanctioned airline. That would lead to virtually no foreign airline flying to Russia. And pressure could be further notched up by banning all flights between North American and European airports and any airport allowing Russian planes (either airliners or private jets) to land.
Agree entirely Andrew. Theyve been timid to a depressing degree (more than I expected when the invasion occurred). Now the plan should be to starve the Russian economy of capital anyway possible--like the GPS idea
What am I missing? Biden creates new sanctions on Russian oil a day or two before he leaves office. Don’t we expect that Trump will reverse those—for humanitarian reasons, he’d say, as the people of Russia are suffering—a day or two after he takes office tomorrow? Delivery of all that oil is delayed less than a week?
We actually don't expect that, given what the next Treasury Secretary said in his confirmation hearing. He hedged that it was Trump's decision, but I doubt he would talk about STRENGTHENING oil sanctions without knowing whether that might displease Trump. So I am cautiously optimistic about THIS narrow aspect of the war.
I think he just 1) genuinely wants to end the war (or rather large scale combat) on any terms that don't make him look weak and 2) wants to help his friends/donors in the oil companies by hiking oil prices (that will also induce them to drill more, and he'll take credit for, while shrugging his shoulders about oil prices and saying he did what he could).
Yep! That is why it is telling about the Biden Administration’s true view of the war and being afraid of Russian collapse and chaos in my opinion (one which I thought was implied by Phillips’ observation). But it also gives Europe a signal immediately about where Trump’s sympathy is (as if they don’t already know) and there is no doubt left.
We have to realise that the US's sympathies have never been with the European people. Here's a nice summary of where we are now. They'll make some performative squawks, but will fall in line.
While Russian collapse (quite possible if Russia loses in Ukraine) will be beneficial to the world in the long term, in the short and medium term it will be like Yugoslavia in the 1990's, only with plenty of nuclear weapons floating around. So it is right to be afraid - and PLAN for it thoroughly. I don't know if Biden actually did that, but Trump surely won't. So prepare to hear a lot of "At least Milosevic did not..."
Looking at the US and parts of Europe and one might well ask if we are all f*cked. This might be the last normal Sunday for a while. Good luck everyone, especially to the Ukrainians.
Good luck to the Ukrainians indeed. They're going to need it given they were already massively in hock to the IMF before the invasion and now the West's looting has stepped up a gear. At least Trump occasionally tells the truth about the US's motives - that's why he's so hated. The EU's simpering Elites will fall into line and their populations will continue to suffer though, they always do.
Many thanks for this update. It has indeed been clear for some time that the race is on to see who tires first. One of the Biden administration’s major fears, what stopped it from going all out to stop Ukraine winning, was the collapse of Putin’s regime with all its unpredictable consequences. Will the Trump administration’s attitude be any different? There must be serious doubts !
I have small rays of hope in places that people are not looking at the moment. Trumps pick for deputy sec of energy is an ex army intel officer with tours in Afghanistan. But he is only deputy. DOE could have influence in energy policy and sanctions that can hurt Russia badly.
The russians are almost certainly lying about their inflation rate. In the US in the early 1979-80 the inflation rate was in the 12 -13% range. The US did raise the fed funds rate for very brief periods to 22% but in the highest year, if memory serves, it averaged around 16% and was much lower by years end. I think this is two months now russias rate has held steady at 22%. Let's see how long it stays there. They're civilian economy must be in deep recession. Their claims about gdp are also likely false, something China has been doing for years now.
On the downside I saw a story that Europe substantially increased its imports of Russian natural gas in January. Don't understand that.
Another downer: Paul Krugman, who has a new so far free substack that he writes in daily, suggests it's likely that the US will soon join China and Russia in manipulating economic statistics.
There's a very long discussion elsewhere (look up Prune60) of how Russia manipulates the official inflation rate. Like most inflation rate calculations, it's calculated off a specific list ("basket") of goods. But not a big, general basket of goods like the US uses. No, it's a very short list.
So the Russian government implements price controls on specific items on that list. Or pressures the narrow group of manufacturers or distributors who make one of those items (such as automobiles) to sell at artificially low prices. Or if one of the items on the list is still going up in price too fast, they just remove it from the list.
So Russian inflation on the things not in the official basket of goods is far, FAR higher, with some estimates being 75%.
And the US doesn't fix it's inflation figures too? Everyone is at it - that's why the US never show their figures. This was from a while ago, but still stands:
You always want to look at the underlying numbers (steel production etc.) and get them from the actual manufacturers. Numbers like "inflation rate" and "GDP" are too easy to manipulate to be disconnected from reality.
American investors have gotten lazy and excessively trusting. In the 1920s they looked at the underlying numbers.
Interesting how it's a short step from a policy of inflicting just enough cost on Russia that any rational realist would withdraw, to a policy of bleeding Russia (and the Russophone world) dry, knowing that its autocratic leader will not withdraw, as he values his own interests over national interests. With so many examples of such autocrats, it's a wonder that realists can ignore them with a straight face.
Great update and fascinating developments. The sanctions regime could have been much stronger and even could be stronger than what the Biden administration has just done. The Russian economy is on the verge of collapse now.
But what of the main export for hard currency: oil. There is a great geopolitical opportunity here for the US. If Russian and Iranian sources of hard currency can be cut off, it changes everything. There is a major incentive of other OPEC members to back this as it raises the price of oil and LNG exports together as these commodity prices move together. The US oil and gas industry would back this and Trump could then boast he has made the US energy dominant.
But it does not come without pain for consumers in the US and Europe. They will bear the rising cost of oil and gas. And we know US consumers will scream about that.
From a pure nat sec perspective anchoring the shadow fleet will reduce the risk of them cutting undersea infrastructure as well.
But I doubt Trump will do that as he loves Putin too much and is tied in too closely to Russian oligarch money for too long. So, alas an opportunity wasted.
FWIW, global peak oil demand may already have occurred, and definitely occurs by 2030. The oil-industry-shills are still lying to themselves, but it's over.
"Sinopec just announced that 2023 marks peak gasoline demand in China."
"Bloomberg has pointed out that peak gasoline and diesel demand has already arrived in the USA and Europe."
"40% of bulk shipping is for bulk coal, oil, and gas, and with peak fossil fuels, that’s peak bulk shipping as well. That segment is going to be collapsing in the coming years, as I’ve discussed with major shipping clients in Europe and Malaysia in the past few months as they try to figure out what to do with their ships, resources, and expertise."
"Half of the world’s economy has already reached peak gasoline and diesel demand while electric vehicle deliveries in every segment are shooting through the roof."
"Another data point. A couple of months ago, mining giants Rio Tinto, BHP, and FMG all announced within a couple of weeks of each other that they were going to be going with battery electric and catenary overhead electric for all of their heavy mining vehicles. When heavy mining vehicles in remote areas are all going electric, there is no road demand that won’t electrify."
It's been a year and the trend has only accelerated.
"On October 27th of 2020, the China Society of Automotive Engineers laid out a roadmap for how the country was going to achieve 50% of all cars sold in 2035 being fully electric, plug-in hybrid, or hydrogen, with 95% of them of course being fully electric. Per projections from HSBC, UBS, Morningstar, and Wood Mackenzie, that’s actually going to happen in 2025, a full decade early, with of course hydrogen cars at perhaps 0.02%, approaching zero."
"China’s 2025 targets include generating 33% of its electricity from renewables, ensuring renewables accounted for over half of its total installed power capacity, and achieving 3.3 trillion kWh of annual power generation from renewable sources. China is ahead of schedule here as well, with renewable energy installations already surpassing the 2025 target, comprising 53.8% of the nation’s total installed capacity as of mid-2024. Renewable electricity generation is also on track to meet the 33% target."
So, back to the obsolete commodity of petroleum, now going into terminal decline. There is a continuous downward pressure on oil prices from the continuous drop in demand.
I'll run through this again (I've written reports on this before).
Economically, there are a lot of moving parts to this: when electricity is above a certain price which is region-dependent based on sunlight, there is mass installation of solar panels; and when it's below a certain price which depends on the price of gasoline, you get mass deployment of electric cars.
The upper threshold for mass EV adoption is about 18c-23c (depending on whether we consider the competition to be Priuses or ICE cars) at current gasoline prices ($3.10/gallon) in the US. The threshold for mass solar adoption is about 14c for the darkest parts of the snowbelt in the US.
Due to delays in deployment -- it takes years for people to buy a new car, or to install solar panels -- the electricity prices will bounce around and not always stay within this range, but it will keep trending back to the range where you have *both* mass solar adoption *and* mass EV adoption*.
Because of the delays in deployment, reversal doesn't really happen; once you switch to EVs you stick with 'em even if the electricity price spikes temporarily, because you aren't going to replace your car every six months. By the time you consider going back to ICE, the solar panels have been installed and the electricity price has dropped again.
This inexorable ratchet could only be stopped if the "adopt EV" price dropped below the "adopt solar" price. This is impossible. In the US, something between $1.35 - $1.65 / gallon of the cost of gasoline is actually not for crude oil (refining, shipping, etc.) and is therefore price-insensitive to crude oil prices.
To get the price of oil for the "run Priuses" option below the "add solar panels in the snowbelt" price, gasoline prices would have to drop below $2.40, which would require the crude oil component of gas prices to drop by >40%, which means oil would have to drop below $48/bbl. This is the most optimistic case for oil-powered land vehicles... and it requires hybrid electric cars *and* areas with poor sunlight. (It also assumes low refining costs.)
To get the price of oil low enough to make "run a normal ICE car" a financially feasible long-term option is impossible: it would require selling gasoline for less than the refining cost.
Saudis can undercut Russia any day of the week. Right now, the only other high-cost producers of relevance are the US, with the awful shale-fracking wells, and Canada, with the awful tar sands. (Venezuela is out of the picture already.)
This means that any attempt to prop up US shale oil (already in terminal decline) will take Russian oil off the market. Do you think the Republican administration will support Putin, or support the US oil patch who has been bribing them for a century?
I wouldn't like to bet either way on that, but the point is, *they can't do both*. It's one OR the other.
In order to prevent Russian oil sales from steeply declining, the US oil industry would have to die.
The US oil industry was actually *propped up financially* by the sanctions on Russian oil -- it was a lifesaver for US oil. OPEC also benefits but is less concerned because they can undercut both Russia and the US.
As oil prices are continually under pressure to decline due to reduced demand, the US oil industry would be expected to campaign for increased sanctions on Russian oil in order to maintain US oil industry profits.
I have to add that the people arguing against near-term peak oil demand are showing signs of extreme ignorance. Specifically, they are ignorant of the marginal-product economic phenomenon in refining. They mostly act as if increases in diesel or jet fuel demand can make up for declines in gasoline demand; they cannot.
I will now walk through the implications of peak GASOLINE demand (even if diesel and jet fuel demand does not drop... which I'll get to later). It is now consensus that peak long-term gasoline demand has already happened.
Refining one barrel of oil produces a bunch of different products (different hydrocarbons, different chain lengths), and to a first approximation, producing more of one produces more of the others.
Gasoline is the one with highest profit margins -- the marginal product -- the source of profits. The demand for crude oil, and the price thereof, is driven in the short term *entirely* by the marginal product, which for decades has been gasoline.
In a gasoline-as-marginal-product regime, demand for diesel, jet fuel, etc. is kind of irrelevant: these are effectively *byproducts* of refining. The refining production capacity and the demand level for crude oil at the refineries is driven by the gasoline demand.
Now, as gasoline demand drops, *eventually* there will be an economic regime change -- the demand for gasoline will be low enough that the refining production capacity and demand for crude oil will be driven by diesel or kerosene (which are to some extent interchangeable, unlike gasoline).
It appears, as I check, that this has happened recently. (I last checked a few years ago when this was not true.) Diesel demand is now higher than gasoline demand. And diesel prices spike far higher than gasoline prices whenever there is a temporary shortage of crude oil (due to sanctions on Russia etc.)
So anyway, to explain the implications of this:
There's an issue in petroleum refining: you can turn long chains into short chains easily, but short chains to long chains is a lot harder. Gasoline is quite short. The only thing you can practically turn it into is vapors / gases (methane, ethylene, propane, butane).
Currently, however, large portions of the other fractions of the refinery are being turned into gasoline.
Suppose you're a refinery operator facing permanent gasoline demand drops.
You can just close the whole damn refinery. This has happened with a very large refinery in Philadelphia. (And a bunch of other refineries in 2020.)
If you don't close it:
With gasoline demand dropping, *first* many of these units of the refinery which convert other things into gasoline have to be closed (leaving *low-value* oil waste products, since they aren't being converted into gasoline any more). A complication is that air quality regulations mean that you can't actually use straight-run (light naphtha) gasoline by itself (it won't burn cleanly enough) so you have to maintain some of these expensive units if you want to sell gasoline.
As the economic regime switches from gasoline-as-marginal-product to diesel/kerosene-as-marginal-product:
You can retool some of the units to convert the heavier fractions of the oil into diesel/kerosene instead of gasoline. This will, of course, happen (but has not happened much yet). This is expensive and you'll have to raise the price of gasoline and diesel to pay for the capital cost of the conversions.
Regardless, you'll end up with far too much of the light products (naphtha, gasoline, and the gaseous products, methane/ethylene/propane/butane/etc.). And with declining demand for gasoline, there's nothing to be done with the naphtha other than cracking it to yet more gaseous products.
This should bring down prices in the traditionally-expensive propane and butane markets, and in the plastics-and-chemicals market (which uses a lot of ethylene). (This seems to be happening.)
It should absolutely flood the NG (methane) market, which is going to stay cheap.
Standalone NG wells are already not a profitable endeavor (they make their money off the liquids, not the gaseous products), although some deranged people keep drilling for them. The massive increase in gaseous products from refineries trying to figure out what to do with the naphtha now that gasoline demand is declining will make standalone NG wells even more implausible.
The gaseous/vapor products have the problem that a huge fraction of their costs are transportation (it's not easy to transport gases -- lots of pressurized tanks and compressor stations and so on), so there's a floor to the pricing, based on transport.
Anyway, the light products glut means there's gonna be no profit there. So the new economic regime will be (perhaps already is?) dominated by diesel and kerosene, primarily diesel.
Jet fuel (8-16 carbon atoms per molecule) is basically kerosene (9-16 carbon atoms per molecule). Diesel (9-25 carbon atoms per molecule) and kerosene have substantial overlap in the chain lengths, so it is possible to switch between these; the vast excess of light products will make it easy to convert diesel to kerosene, though not vice versa (https://www.researchgate.net/figure/Carbon-Number-Ranges-and-Associated-Boiling-Point-Ranges-of-Different-Fuels-and-Oils_tbl1_227249188 ). This and the existing demand profile means diesel will be the next marginal product. And again, looking at recent news reports, perhaps arguably it already is.
Before the refineries can retool to deal with this massive industry disruption, however... diesel demand is already dropping. 65% of diesel is used for road vehicles. The following are the sources of reduction in demand there: (a) elimination of diesel cars from the market, (b) electric buses, (c) electric trucks (big boom in these in China, 150 mi. range can be bought off the shelf from BYD), (d) electric construction equipment, (e) shipping moved from trucks to more-efficient trains and ships, etc.
I'd expect the diesel demand to have a longer tail than the gasoline demand due to the difficulties of long-haul trucking (a small fraction of the market, most trucking is short-haul), and marine diesel (where demand is increasing as super-polluting fuels made from oil waste are banned). Gasoline, by contrast, is basically passenger cars only. But the decline in diesel demand already started.
The price dynamics are exactly the same for diesel as for gasoline -- when diesel is above a certain price, everyone who can switches to electric -- except that the purchasers of diesel equipment are hard-headed financial calculators, and will not buy ICE vehicles for irrational emotional reasons like the buyers of gasoline cars.
As soon as the TCO is better, they switch to electric. The TCO isn't yet better for all use cases, but BYD's burgeoning sales show that the TCO for electric is better in enough cases to make a major drag on the diesel market. The price of diesel as road fuel already exceeds the price of gasoline as road fuel (in $ per km), so this downward demand pressure is already in the inexorable-ratchet territory.
Which means it may not make sense economically to retool the refineries to produce more diesel. It may make more sense for you as a refinery owner to let diesel prices rise (regardless of crude oil prices), and collect your profits -- and watch diesel demand decline faster.
Echo that. And as both an EV and a diesel owner, I see it at the pump - it’s been a mystery why diesel prices stay so high when oil prices fall. Now I understand. I’m insensitive to electric prices because of rooftop solar panels. Still, long distance trucking remains a challenge and will probably run on diesel for a while yet.
I will add that Ukraine bombing Russian oil refineries is an economic benefit to every other refinery in the world. Refinery profit margins are tiny right now, and they are facing massive retooling expenses.
Removing refineries from the market is great for the surviving refineries. You would expect refinery owners worldwide to be big fans of Ukraine's campaign against Russian oil refineries.
Note that with this economic situation, Russia being forced to export crude (which has permanent downward price pressure) and then import diesel (whose price could go up in the short run due entirely to refinery capacity limitations) is an exceptionally pernicious position for Russia financially.
Anyway, that's a lot of economic analysis.
The primary implication for Russia is: crude oil sales ain't gonna save them, and they face permanent declining revenues from oil sales, with no escape unless someone shuts down US oil first, which seems unlikely to happen.
The Biden administration has been pretty bad, however no other country has done more to help Putin's regime than Germany. And now the pro-Putin AfD party is trending above 20% in the polls for the next federal election, with each new poll showing it gaining more potential voters, mainly at the expense of the CDU and its candidate Friedrich Merz, who has taken a relatively tough stance on Russia. I'm quite nervous about what's going to happen on this old continent in the next few months.
Unfortunately there are too many “Putinversteher” in the CDU as well, particularly in their Bavarian branch CSU. The latter are campaigning strongly against the Greens who are -astonishingly - the only German party standing unanimously strong against Putin. After the snap election in February CDU/CSU will need a partner to govern and there is a good chance that they can choose between the Greens and Scholz’ appeasing, de facto pro-Russian SPD. The Christian democrats traditional partner F.D.P , the liberal “Free Democrats” are so weak (according to the polls) that they can’t be sure to make it into the next Bundestag. The SPD campaigns Scholz as sober minded, cool headed chancellor for peace. May the German electorate recognise these claims as dishonest and pathetic as they are. A black/green government in Germany will have many severe flaws but it is the best possible solution during this war.
I agree. And as I recall, CSU has always been quirky (I heard stories from inside sources back in the 90's). But I'm concerned about whether CDU/CSU will be able to form a black/green/yellow coalition, given that the yellow may not make the threshold (for that matter, while I understand the rationale for FDP back in the 1950's when they were the only unabashedly pro-market party, I don't really see the point of them ever since the CDU moved to the right on economics - and apparently neither do about 95% of German voters).
Borrowing another’s idea: as AFD is very anti-immigration, why do they not wish to remove a reason for immigration by more actively supporting Ukraine, at least when it comes to defense and support for civil society?
‘’The Financial Times in one striking piece published this week, likened the Russian economy to a House of Cards. I you do have a subscription, please read’’
One note on sanctions not mentioned in the column: while the sanctions did not prevent the Russians from selling oil, it substantially lowered the profit they obtained for it.
"The decline in Russian oil export revenue since January 2022 was achieved by reducing the Russian export price rather than the volume of Russian oil exports. Estimates suggest that roughly half of the steeper Russian price discount in May 2023 arose from Russia having to redirect its oil exports to more distant destinations. The remainder of the change in the Russian price discount can be explained by a modest increase in Indian and Chinese market power due to the segmentation of the global oil market....The discount was $13 per barrel in September 2023. By February 2024, it had increased only by a few dollars to $17, with the Urals price remaining above the price cap of $60."
Chart 2 shows this graphically.
Now, I'm not sure I understand why the Dallas Fed was so lukewarm on the efficacy of sanctions. The whole point of sanctions wasn't to lower the volume of exports--which would have strained Western economies. The point of sanctions was to stress the Russian economy by reducing their export earnings. Sanctions that hurt you and your allies are not sustainable. The fact that it benefited China and India is a regrettable side effect. So the claim that "only just this week did the sanctions against Russian oil sales become strong enough to make a major hit to Russia’s ongoing ability to sell huge amounts of oil," seems to somewhat miss the point.
Off on a tangent here but how has Philip Morris tobacco avoided these sanctions? Maybe because cigarettes will eventually kill Russian soldiers so may as well cash in large now I guess.
Well, Putin was not invited to DC for the inauguration. Where do they meet? The idea that Trump will surrender Ukraine and make a deal with his dear friend is pretty shallow. Too many other factors in the mix.
The problem for Ukraine is something that Trump won't be able to fix - it's the fact that the West's munitions are nowhere near as good as their brochures promise and they're not available in sufficient numbers.
As for 'tough' sanctions on Russia these will hurt them, but they will also hurt most of the US's vassals in Europe. These sanctions have always been a circular firing squad and an excellent tool for the US plutocrats to further loot Europe with their industries moving across the Atlantic now that the EU has meekly toed the line and pled ignorance about the complete mystery of who blew up NordStream. Volkeswagen is closing factories in Europe now and all of their heavy industry is under massive strain. The mouthy, Italian nationalists are selling off their assets to the yanks and the Thatcherite goons of the AfD & Reform will be happy to do so when they take power from the centrist slop who infect the governments of most European states - and that they will do so is inevitable. I think teh chances of Russia collapsing are aboiut equal with those of the EU suffering the same fate - and it will be only ourselves to blame.
The problem for Ukraine is something that Trump won't be able to fix - it's the fact that the West's munitions are nowhere near as good as their brochures promise and they're not available in sufficient numbers.
As for 'tough' sanctions on Russia these will hurt them, but they will also hurt most of the US's vassals in Europe. These sanctions have always been a circular firing squad and an excellent tool for the US plutocrats to further loot Europe with their industries moving across the Atlantic now that the EU has meekly toed the line and pled ignorance about the complete mystery of who blew up NordStream. Volkeswagen is closing factories in Europe now and likewise German heavy industry is under massive strain and yet our pathetic Elites lap it up. The alleged Nationalists in Italy are happy to flog off their assets to the yanks and
The problem for Ukraine is something that Trump won't be able to fix - it's the fact that the West's munitions are nowhere near as good as their brochures promise and they're not available in sufficient numbers.
As for 'tough' sanctions on Russia these will hurt them, but they will also hurt most of the US's vassals in Europe. These sanctions have always been a circular firing squad and an excellent tool for the US plutocrats to further loot Europe with their industries moving across the Atlantic now that the EU has meekly toed the line and pled ignorance about the complete mystery of who blew up NordStream. Volkeswagen is closing factories in Europe now and likewise German heavy industry is under massive strain and yet our pathetic Elites lap it up. The alleged Nationalists in Italy are happy to flog off their assets to the yanks and
The sanctions are still too timid. E.g. there has been no response to Russia jamming GPS signals over the Baltic area. The appropriate response would be to announce that any airline flying through Russian airspace would be banned from North American and European airspace. That would stop all major non-Western airlines from flying to Russia or even flying over Russia between East Asia and Europe (giving them competitive advantage over European and Japanese airlines flying longer routes to avoid Russia). Furthermore, a warning could be issued that if Russia does not cease and desist, airlines holding a stake in sanctioned airlines would be sanctioned too (and then airlines having codesharing agreements with them), potentially with further escalation to ban US banks from dealing with any sanctioned airline and (ultimately) any bank dealing with a sanctioned airline. That would lead to virtually no foreign airline flying to Russia. And pressure could be further notched up by banning all flights between North American and European airports and any airport allowing Russian planes (either airliners or private jets) to land.
Agree entirely Andrew. Theyve been timid to a depressing degree (more than I expected when the invasion occurred). Now the plan should be to starve the Russian economy of capital anyway possible--like the GPS idea
What am I missing? Biden creates new sanctions on Russian oil a day or two before he leaves office. Don’t we expect that Trump will reverse those—for humanitarian reasons, he’d say, as the people of Russia are suffering—a day or two after he takes office tomorrow? Delivery of all that oil is delayed less than a week?
We actually don't expect that, given what the next Treasury Secretary said in his confirmation hearing. He hedged that it was Trump's decision, but I doubt he would talk about STRENGTHENING oil sanctions without knowing whether that might displease Trump. So I am cautiously optimistic about THIS narrow aspect of the war.
I hope you’re right, Andrew. Maybe Trump wants to buy the sanctioned oil before releasing the sanctions? That’s too cynical, I suppose.
I think he just 1) genuinely wants to end the war (or rather large scale combat) on any terms that don't make him look weak and 2) wants to help his friends/donors in the oil companies by hiking oil prices (that will also induce them to drill more, and he'll take credit for, while shrugging his shoulders about oil prices and saying he did what he could).
Yep! That is why it is telling about the Biden Administration’s true view of the war and being afraid of Russian collapse and chaos in my opinion (one which I thought was implied by Phillips’ observation). But it also gives Europe a signal immediately about where Trump’s sympathy is (as if they don’t already know) and there is no doubt left.
We have to realise that the US's sympathies have never been with the European people. Here's a nice summary of where we are now. They'll make some performative squawks, but will fall in line.
https://www.nakedcapitalism.com/2025/01/what-will-a-trump-aligned-eu-look-like.html
While Russian collapse (quite possible if Russia loses in Ukraine) will be beneficial to the world in the long term, in the short and medium term it will be like Yugoslavia in the 1990's, only with plenty of nuclear weapons floating around. So it is right to be afraid - and PLAN for it thoroughly. I don't know if Biden actually did that, but Trump surely won't. So prepare to hear a lot of "At least Milosevic did not..."
What's the appropriate response to the West engineering Ukraine into a state of punitive debt peonage?
https://www.cadtm.org/Ukraine-s-Debt-an-instrument-of-pressure-and-spoliation-in-the-hands-of
Looking at the US and parts of Europe and one might well ask if we are all f*cked. This might be the last normal Sunday for a while. Good luck everyone, especially to the Ukrainians.
Good luck to the Ukrainians indeed. They're going to need it given they were already massively in hock to the IMF before the invasion and now the West's looting has stepped up a gear. At least Trump occasionally tells the truth about the US's motives - that's why he's so hated. The EU's simpering Elites will fall into line and their populations will continue to suffer though, they always do.
https://www.cadtm.org/Ukraine-s-Debt-an-instrument-of-pressure-and-spoliation-in-the-hands-of
Many thanks for this update. It has indeed been clear for some time that the race is on to see who tires first. One of the Biden administration’s major fears, what stopped it from going all out to stop Ukraine winning, was the collapse of Putin’s regime with all its unpredictable consequences. Will the Trump administration’s attitude be any different? There must be serious doubts !
The worry is that the Trump administration will be worse.
It will be.
ugh
I have small rays of hope in places that people are not looking at the moment. Trumps pick for deputy sec of energy is an ex army intel officer with tours in Afghanistan. But he is only deputy. DOE could have influence in energy policy and sanctions that can hurt Russia badly.
The russians are almost certainly lying about their inflation rate. In the US in the early 1979-80 the inflation rate was in the 12 -13% range. The US did raise the fed funds rate for very brief periods to 22% but in the highest year, if memory serves, it averaged around 16% and was much lower by years end. I think this is two months now russias rate has held steady at 22%. Let's see how long it stays there. They're civilian economy must be in deep recession. Their claims about gdp are also likely false, something China has been doing for years now.
On the downside I saw a story that Europe substantially increased its imports of Russian natural gas in January. Don't understand that.
Another downer: Paul Krugman, who has a new so far free substack that he writes in daily, suggests it's likely that the US will soon join China and Russia in manipulating economic statistics.
Sigh.
There's a very long discussion elsewhere (look up Prune60) of how Russia manipulates the official inflation rate. Like most inflation rate calculations, it's calculated off a specific list ("basket") of goods. But not a big, general basket of goods like the US uses. No, it's a very short list.
So the Russian government implements price controls on specific items on that list. Or pressures the narrow group of manufacturers or distributors who make one of those items (such as automobiles) to sell at artificially low prices. Or if one of the items on the list is still going up in price too fast, they just remove it from the list.
So Russian inflation on the things not in the official basket of goods is far, FAR higher, with some estimates being 75%.
And the US doesn't fix it's inflation figures too? Everyone is at it - that's why the US never show their figures. This was from a while ago, but still stands:
https://www.forbes.com/sites/perianneboring/2014/02/03/if-you-want-to-know-the-real-rate-of-inflation-dont-bother-with-the-cpi/
You always want to look at the underlying numbers (steel production etc.) and get them from the actual manufacturers. Numbers like "inflation rate" and "GDP" are too easy to manipulate to be disconnected from reality.
American investors have gotten lazy and excessively trusting. In the 1920s they looked at the underlying numbers.
Interesting how it's a short step from a policy of inflicting just enough cost on Russia that any rational realist would withdraw, to a policy of bleeding Russia (and the Russophone world) dry, knowing that its autocratic leader will not withdraw, as he values his own interests over national interests. With so many examples of such autocrats, it's a wonder that realists can ignore them with a straight face.
Great update and fascinating developments. The sanctions regime could have been much stronger and even could be stronger than what the Biden administration has just done. The Russian economy is on the verge of collapse now.
But what of the main export for hard currency: oil. There is a great geopolitical opportunity here for the US. If Russian and Iranian sources of hard currency can be cut off, it changes everything. There is a major incentive of other OPEC members to back this as it raises the price of oil and LNG exports together as these commodity prices move together. The US oil and gas industry would back this and Trump could then boast he has made the US energy dominant.
But it does not come without pain for consumers in the US and Europe. They will bear the rising cost of oil and gas. And we know US consumers will scream about that.
From a pure nat sec perspective anchoring the shadow fleet will reduce the risk of them cutting undersea infrastructure as well.
But I doubt Trump will do that as he loves Putin too much and is tied in too closely to Russian oligarch money for too long. So, alas an opportunity wasted.
FWIW, global peak oil demand may already have occurred, and definitely occurs by 2030. The oil-industry-shills are still lying to themselves, but it's over.
Long essay follows.
https://cleantechnica.com/2023/10/11/chinas-oil-gas-giant-sinopec-says-peak-oil-demand-already-happened-in-china/
"Sinopec just announced that 2023 marks peak gasoline demand in China."
"Bloomberg has pointed out that peak gasoline and diesel demand has already arrived in the USA and Europe."
"40% of bulk shipping is for bulk coal, oil, and gas, and with peak fossil fuels, that’s peak bulk shipping as well. That segment is going to be collapsing in the coming years, as I’ve discussed with major shipping clients in Europe and Malaysia in the past few months as they try to figure out what to do with their ships, resources, and expertise."
"Half of the world’s economy has already reached peak gasoline and diesel demand while electric vehicle deliveries in every segment are shooting through the roof."
"Another data point. A couple of months ago, mining giants Rio Tinto, BHP, and FMG all announced within a couple of weeks of each other that they were going to be going with battery electric and catenary overhead electric for all of their heavy mining vehicles. When heavy mining vehicles in remote areas are all going electric, there is no road demand that won’t electrify."
It's been a year and the trend has only accelerated.
You may also want to take a look at this:
https://cleantechnica.com/2024/12/27/china-hits-ev-target-10-years-early-still-hasnt-reached-2020-nuclear-target/
"On October 27th of 2020, the China Society of Automotive Engineers laid out a roadmap for how the country was going to achieve 50% of all cars sold in 2035 being fully electric, plug-in hybrid, or hydrogen, with 95% of them of course being fully electric. Per projections from HSBC, UBS, Morningstar, and Wood Mackenzie, that’s actually going to happen in 2025, a full decade early, with of course hydrogen cars at perhaps 0.02%, approaching zero."
"China’s 2025 targets include generating 33% of its electricity from renewables, ensuring renewables accounted for over half of its total installed power capacity, and achieving 3.3 trillion kWh of annual power generation from renewable sources. China is ahead of schedule here as well, with renewable energy installations already surpassing the 2025 target, comprising 53.8% of the nation’s total installed capacity as of mid-2024. Renewable electricity generation is also on track to meet the 33% target."
So, back to the obsolete commodity of petroleum, now going into terminal decline. There is a continuous downward pressure on oil prices from the continuous drop in demand.
I'll run through this again (I've written reports on this before).
Economically, there are a lot of moving parts to this: when electricity is above a certain price which is region-dependent based on sunlight, there is mass installation of solar panels; and when it's below a certain price which depends on the price of gasoline, you get mass deployment of electric cars.
The upper threshold for mass EV adoption is about 18c-23c (depending on whether we consider the competition to be Priuses or ICE cars) at current gasoline prices ($3.10/gallon) in the US. The threshold for mass solar adoption is about 14c for the darkest parts of the snowbelt in the US.
Due to delays in deployment -- it takes years for people to buy a new car, or to install solar panels -- the electricity prices will bounce around and not always stay within this range, but it will keep trending back to the range where you have *both* mass solar adoption *and* mass EV adoption*.
Because of the delays in deployment, reversal doesn't really happen; once you switch to EVs you stick with 'em even if the electricity price spikes temporarily, because you aren't going to replace your car every six months. By the time you consider going back to ICE, the solar panels have been installed and the electricity price has dropped again.
This inexorable ratchet could only be stopped if the "adopt EV" price dropped below the "adopt solar" price. This is impossible. In the US, something between $1.35 - $1.65 / gallon of the cost of gasoline is actually not for crude oil (refining, shipping, etc.) and is therefore price-insensitive to crude oil prices.
To get the price of oil for the "run Priuses" option below the "add solar panels in the snowbelt" price, gasoline prices would have to drop below $2.40, which would require the crude oil component of gas prices to drop by >40%, which means oil would have to drop below $48/bbl. This is the most optimistic case for oil-powered land vehicles... and it requires hybrid electric cars *and* areas with poor sunlight. (It also assumes low refining costs.)
To get the price of oil low enough to make "run a normal ICE car" a financially feasible long-term option is impossible: it would require selling gasoline for less than the refining cost.
So back to oil, with its ever-declining demand.
Russia is a high-cost producer.
https://biznesalert.com/russia-oil-extraction-cost-analysis/
Saudis can undercut Russia any day of the week. Right now, the only other high-cost producers of relevance are the US, with the awful shale-fracking wells, and Canada, with the awful tar sands. (Venezuela is out of the picture already.)
This means that any attempt to prop up US shale oil (already in terminal decline) will take Russian oil off the market. Do you think the Republican administration will support Putin, or support the US oil patch who has been bribing them for a century?
I wouldn't like to bet either way on that, but the point is, *they can't do both*. It's one OR the other.
In order to prevent Russian oil sales from steeply declining, the US oil industry would have to die.
The US oil industry was actually *propped up financially* by the sanctions on Russian oil -- it was a lifesaver for US oil. OPEC also benefits but is less concerned because they can undercut both Russia and the US.
As oil prices are continually under pressure to decline due to reduced demand, the US oil industry would be expected to campaign for increased sanctions on Russian oil in order to maintain US oil industry profits.
I have to add that the people arguing against near-term peak oil demand are showing signs of extreme ignorance. Specifically, they are ignorant of the marginal-product economic phenomenon in refining. They mostly act as if increases in diesel or jet fuel demand can make up for declines in gasoline demand; they cannot.
I will now walk through the implications of peak GASOLINE demand (even if diesel and jet fuel demand does not drop... which I'll get to later). It is now consensus that peak long-term gasoline demand has already happened.
Refining one barrel of oil produces a bunch of different products (different hydrocarbons, different chain lengths), and to a first approximation, producing more of one produces more of the others.
Gasoline is the one with highest profit margins -- the marginal product -- the source of profits. The demand for crude oil, and the price thereof, is driven in the short term *entirely* by the marginal product, which for decades has been gasoline.
In a gasoline-as-marginal-product regime, demand for diesel, jet fuel, etc. is kind of irrelevant: these are effectively *byproducts* of refining. The refining production capacity and the demand level for crude oil at the refineries is driven by the gasoline demand.
Now, as gasoline demand drops, *eventually* there will be an economic regime change -- the demand for gasoline will be low enough that the refining production capacity and demand for crude oil will be driven by diesel or kerosene (which are to some extent interchangeable, unlike gasoline).
It appears, as I check, that this has happened recently. (I last checked a few years ago when this was not true.) Diesel demand is now higher than gasoline demand. And diesel prices spike far higher than gasoline prices whenever there is a temporary shortage of crude oil (due to sanctions on Russia etc.)
So anyway, to explain the implications of this:
There's an issue in petroleum refining: you can turn long chains into short chains easily, but short chains to long chains is a lot harder. Gasoline is quite short. The only thing you can practically turn it into is vapors / gases (methane, ethylene, propane, butane).
Currently, however, large portions of the other fractions of the refinery are being turned into gasoline.
https://www.researchgate.net/profile/Aisha-Al-Moubaraki/publication/355678568/figure/fig3/AS:1089408786804739@1636746703622/Process-flow-diagram-of-a-typical-refinery.png
Suppose you're a refinery operator facing permanent gasoline demand drops.
You can just close the whole damn refinery. This has happened with a very large refinery in Philadelphia. (And a bunch of other refineries in 2020.)
If you don't close it:
With gasoline demand dropping, *first* many of these units of the refinery which convert other things into gasoline have to be closed (leaving *low-value* oil waste products, since they aren't being converted into gasoline any more). A complication is that air quality regulations mean that you can't actually use straight-run (light naphtha) gasoline by itself (it won't burn cleanly enough) so you have to maintain some of these expensive units if you want to sell gasoline.
As the economic regime switches from gasoline-as-marginal-product to diesel/kerosene-as-marginal-product:
You can retool some of the units to convert the heavier fractions of the oil into diesel/kerosene instead of gasoline. This will, of course, happen (but has not happened much yet). This is expensive and you'll have to raise the price of gasoline and diesel to pay for the capital cost of the conversions.
Regardless, you'll end up with far too much of the light products (naphtha, gasoline, and the gaseous products, methane/ethylene/propane/butane/etc.). And with declining demand for gasoline, there's nothing to be done with the naphtha other than cracking it to yet more gaseous products.
This should bring down prices in the traditionally-expensive propane and butane markets, and in the plastics-and-chemicals market (which uses a lot of ethylene). (This seems to be happening.)
It should absolutely flood the NG (methane) market, which is going to stay cheap.
Standalone NG wells are already not a profitable endeavor (they make their money off the liquids, not the gaseous products), although some deranged people keep drilling for them. The massive increase in gaseous products from refineries trying to figure out what to do with the naphtha now that gasoline demand is declining will make standalone NG wells even more implausible.
The gaseous/vapor products have the problem that a huge fraction of their costs are transportation (it's not easy to transport gases -- lots of pressurized tanks and compressor stations and so on), so there's a floor to the pricing, based on transport.
Anyway, the light products glut means there's gonna be no profit there. So the new economic regime will be (perhaps already is?) dominated by diesel and kerosene, primarily diesel.
Jet fuel (8-16 carbon atoms per molecule) is basically kerosene (9-16 carbon atoms per molecule). Diesel (9-25 carbon atoms per molecule) and kerosene have substantial overlap in the chain lengths, so it is possible to switch between these; the vast excess of light products will make it easy to convert diesel to kerosene, though not vice versa (https://www.researchgate.net/figure/Carbon-Number-Ranges-and-Associated-Boiling-Point-Ranges-of-Different-Fuels-and-Oils_tbl1_227249188 ). This and the existing demand profile means diesel will be the next marginal product. And again, looking at recent news reports, perhaps arguably it already is.
Before the refineries can retool to deal with this massive industry disruption, however... diesel demand is already dropping. 65% of diesel is used for road vehicles. The following are the sources of reduction in demand there: (a) elimination of diesel cars from the market, (b) electric buses, (c) electric trucks (big boom in these in China, 150 mi. range can be bought off the shelf from BYD), (d) electric construction equipment, (e) shipping moved from trucks to more-efficient trains and ships, etc.
I'd expect the diesel demand to have a longer tail than the gasoline demand due to the difficulties of long-haul trucking (a small fraction of the market, most trucking is short-haul), and marine diesel (where demand is increasing as super-polluting fuels made from oil waste are banned). Gasoline, by contrast, is basically passenger cars only. But the decline in diesel demand already started.
https://www.bnnbloomberg.ca/investing/2024/11/05/diesel-set-for-growing-glut-as-demand-falters/
The price dynamics are exactly the same for diesel as for gasoline -- when diesel is above a certain price, everyone who can switches to electric -- except that the purchasers of diesel equipment are hard-headed financial calculators, and will not buy ICE vehicles for irrational emotional reasons like the buyers of gasoline cars.
As soon as the TCO is better, they switch to electric. The TCO isn't yet better for all use cases, but BYD's burgeoning sales show that the TCO for electric is better in enough cases to make a major drag on the diesel market. The price of diesel as road fuel already exceeds the price of gasoline as road fuel (in $ per km), so this downward demand pressure is already in the inexorable-ratchet territory.
Which means it may not make sense economically to retool the refineries to produce more diesel. It may make more sense for you as a refinery owner to let diesel prices rise (regardless of crude oil prices), and collect your profits -- and watch diesel demand decline faster.
Echo that. And as both an EV and a diesel owner, I see it at the pump - it’s been a mystery why diesel prices stay so high when oil prices fall. Now I understand. I’m insensitive to electric prices because of rooftop solar panels. Still, long distance trucking remains a challenge and will probably run on diesel for a while yet.
I will add that Ukraine bombing Russian oil refineries is an economic benefit to every other refinery in the world. Refinery profit margins are tiny right now, and they are facing massive retooling expenses.
Removing refineries from the market is great for the surviving refineries. You would expect refinery owners worldwide to be big fans of Ukraine's campaign against Russian oil refineries.
Thank you for Professor Neroden, great class today 👍🏽
Very interesting. Thank you.
Note that with this economic situation, Russia being forced to export crude (which has permanent downward price pressure) and then import diesel (whose price could go up in the short run due entirely to refinery capacity limitations) is an exceptionally pernicious position for Russia financially.
Anyway, that's a lot of economic analysis.
The primary implication for Russia is: crude oil sales ain't gonna save them, and they face permanent declining revenues from oil sales, with no escape unless someone shuts down US oil first, which seems unlikely to happen.
The Biden administration has been pretty bad, however no other country has done more to help Putin's regime than Germany. And now the pro-Putin AfD party is trending above 20% in the polls for the next federal election, with each new poll showing it gaining more potential voters, mainly at the expense of the CDU and its candidate Friedrich Merz, who has taken a relatively tough stance on Russia. I'm quite nervous about what's going to happen on this old continent in the next few months.
No respectable party will join a coalition with AfD. The only question is whether a government will be possible without SPD.
Unfortunately there are too many “Putinversteher” in the CDU as well, particularly in their Bavarian branch CSU. The latter are campaigning strongly against the Greens who are -astonishingly - the only German party standing unanimously strong against Putin. After the snap election in February CDU/CSU will need a partner to govern and there is a good chance that they can choose between the Greens and Scholz’ appeasing, de facto pro-Russian SPD. The Christian democrats traditional partner F.D.P , the liberal “Free Democrats” are so weak (according to the polls) that they can’t be sure to make it into the next Bundestag. The SPD campaigns Scholz as sober minded, cool headed chancellor for peace. May the German electorate recognise these claims as dishonest and pathetic as they are. A black/green government in Germany will have many severe flaws but it is the best possible solution during this war.
I agree. And as I recall, CSU has always been quirky (I heard stories from inside sources back in the 90's). But I'm concerned about whether CDU/CSU will be able to form a black/green/yellow coalition, given that the yellow may not make the threshold (for that matter, while I understand the rationale for FDP back in the 1950's when they were the only unabashedly pro-market party, I don't really see the point of them ever since the CDU moved to the right on economics - and apparently neither do about 95% of German voters).
Borrowing another’s idea: as AFD is very anti-immigration, why do they not wish to remove a reason for immigration by more actively supporting Ukraine, at least when it comes to defense and support for civil society?
Because they are financed by Putin.
‘’The Financial Times in one striking piece published this week, likened the Russian economy to a House of Cards. I you do have a subscription, please read’’
Which peace?
sorry--changed the link. Had the wrong link in the piece at start
right link is there now
Thank you
One note on sanctions not mentioned in the column: while the sanctions did not prevent the Russians from selling oil, it substantially lowered the profit they obtained for it.
From the Federal Reserve of Dallas: (https://www.dallasfed.org/research/economics/2024/0514) data showing that although the sanctions did not fully succeed,
"The decline in Russian oil export revenue since January 2022 was achieved by reducing the Russian export price rather than the volume of Russian oil exports. Estimates suggest that roughly half of the steeper Russian price discount in May 2023 arose from Russia having to redirect its oil exports to more distant destinations. The remainder of the change in the Russian price discount can be explained by a modest increase in Indian and Chinese market power due to the segmentation of the global oil market....The discount was $13 per barrel in September 2023. By February 2024, it had increased only by a few dollars to $17, with the Urals price remaining above the price cap of $60."
Chart 2 shows this graphically.
Now, I'm not sure I understand why the Dallas Fed was so lukewarm on the efficacy of sanctions. The whole point of sanctions wasn't to lower the volume of exports--which would have strained Western economies. The point of sanctions was to stress the Russian economy by reducing their export earnings. Sanctions that hurt you and your allies are not sustainable. The fact that it benefited China and India is a regrettable side effect. So the claim that "only just this week did the sanctions against Russian oil sales become strong enough to make a major hit to Russia’s ongoing ability to sell huge amounts of oil," seems to somewhat miss the point.
Off on a tangent here but how has Philip Morris tobacco avoided these sanctions? Maybe because cigarettes will eventually kill Russian soldiers so may as well cash in large now I guess.
Well, Putin was not invited to DC for the inauguration. Where do they meet? The idea that Trump will surrender Ukraine and make a deal with his dear friend is pretty shallow. Too many other factors in the mix.
The problem for Ukraine is something that Trump won't be able to fix - it's the fact that the West's munitions are nowhere near as good as their brochures promise and they're not available in sufficient numbers.
As for 'tough' sanctions on Russia these will hurt them, but they will also hurt most of the US's vassals in Europe. These sanctions have always been a circular firing squad and an excellent tool for the US plutocrats to further loot Europe with their industries moving across the Atlantic now that the EU has meekly toed the line and pled ignorance about the complete mystery of who blew up NordStream. Volkeswagen is closing factories in Europe now and all of their heavy industry is under massive strain. The mouthy, Italian nationalists are selling off their assets to the yanks and the Thatcherite goons of the AfD & Reform will be happy to do so when they take power from the centrist slop who infect the governments of most European states - and that they will do so is inevitable. I think teh chances of Russia collapsing are aboiut equal with those of the EU suffering the same fate - and it will be only ourselves to blame.
The problem for Ukraine is something that Trump won't be able to fix - it's the fact that the West's munitions are nowhere near as good as their brochures promise and they're not available in sufficient numbers.
As for 'tough' sanctions on Russia these will hurt them, but they will also hurt most of the US's vassals in Europe. These sanctions have always been a circular firing squad and an excellent tool for the US plutocrats to further loot Europe with their industries moving across the Atlantic now that the EU has meekly toed the line and pled ignorance about the complete mystery of who blew up NordStream. Volkeswagen is closing factories in Europe now and likewise German heavy industry is under massive strain and yet our pathetic Elites lap it up. The alleged Nationalists in Italy are happy to flog off their assets to the yanks and
The problem for Ukraine is something that Trump won't be able to fix - it's the fact that the West's munitions are nowhere near as good as their brochures promise and they're not available in sufficient numbers.
As for 'tough' sanctions on Russia these will hurt them, but they will also hurt most of the US's vassals in Europe. These sanctions have always been a circular firing squad and an excellent tool for the US plutocrats to further loot Europe with their industries moving across the Atlantic now that the EU has meekly toed the line and pled ignorance about the complete mystery of who blew up NordStream. Volkeswagen is closing factories in Europe now and likewise German heavy industry is under massive strain and yet our pathetic Elites lap it up. The alleged Nationalists in Italy are happy to flog off their assets to the yanks and