Russia and Saudi Arabia's restrictions on the oil market have started to have a negative impact on the US and EU markets.
The well-coordinated actions of Saudi Arabia and Russia to restrict oil supply have already started to "pay off". On the one hand, this is having an unpleasant effect on Western countries in the form of higher gasoline prices and the risk of recession. On the other hand, the cost of Russian Urals is already rising, which promises to return Russia's oil and gas revenues to growth.
In our article we reported that Saudi Arabia's Energy Minister, Prince Abdulaziz bin Salman al Saud, defended the recent decisions of Riyadh and Moscow to reduce oil, despite the cautious reception by the market. The small increase in the price of Brent crude was short-lived.
The rise in petrol prices is due to the increase in the price of oil on the world market. According to the American Automobile Association, retail gasoline prices in the US are rising again, threatening to exacerbate the inflationary problem that the Fed is persistently fighting by raising interest rates. A gallon of gasoline is trading at an average of $3.89, the highest level since October 2022.
For the U.S., expensive gas is a problem because most Americans travel by car, and for them, gas costs are a daily expense, along with food and rent.
A one-cent increase in the price of a gallon of gasoline in the U.S. takes away about $1.15 billion in purchasing power annually, calculated Brett Ryan, a senior economist at Deutsche Bank, according to Bloomberg. That means, consumers are starting to spend more money on gasoline and have less money for other goods and services.
We should point out that, last summer, Joe Biden was forced to sell a huge chunk of the country's strategic oil reserves in order to keep gas station prices low and keep the electorate "loyal."
Finally, the rise in the price of petrol leads to higher prices everywhere for all goods and services. And this creates risks that inflation in the US will rise again.
Last year, inflation in the US reached a 40-year high. And the Federal Reserve had to raise the interest rate in the "fight" against it. And now economists are wondering if the Fed can stop or if it should continue to raise interest rates. And this is fraught with the risks of new bank failures, financial instability and the emergence of a full-blown crisis.
Another victim of the coordinated actions of Russia and Saudi Arabia has been the European Union. Firstly, the EU is a major importer of oil, so its energy costs increase directly as global oil prices rise.
Secondly, the European Union has placed itself in a less advantageous position by forcibly driving a large and, more importantly, more profitable oil supplier, Russia, out of its market. At least the cost of transporting Russian oil to Europe used to be lower and now this cost to Europeans has clearly increased. Not to mention, European refineries have often had lucrative contracts to supply crude oil from Russia.
All this has led to the fact that Saudi Arabia, which is now actively supplying its oil to Europe, is going to increase the price of its oil. After all, Europe has nowhere to go, it no longer has many options.
The Saudis are raising the price of their oil for the third month in a row. And now they've announced that starting in September, Saudi Aramco will raise prices again for consumers in Europe and Asia.
For customers in northwestern Europe, prices are going up by one to three dollars. For buyers in the Mediterranean, the price increase turned out to be slightly softer - by $0.1 to $1.5 a barrel. This will clearly lead to higher fuel prices in Europe. Petrol is already becoming more expensive amidst growing demand and problems with its own processing.
The EU as a whole is facing the same problem as the US with inflation and its unpleasant consequences. In an attempt to fight inflation, the ECB is taking the same steps as the Fed.
At the same time, the consequences for the European economy of further tightening of monetary policy may prove to be no less dismal than in the United States.
Economists are already saying that the eurozone could slip into a real recession in 2024. Moreover, some do not even rule out a serious decline of the eurozone economy to 5%. The consequences of this crisis, if it happens, will be even worse than the previous one in 2008-2009.
However, the problems of the Western countries are of little concern to Saudi Arabia and Russia, since the two biggest oil players in the world are solving their problems. They are extending restrictions on oil supply to the market because demand from China is visible.
Already in August, Russia's Finance Ministry expects additional oil and gas revenues. Although since the beginning of the year, oil and gas revenues have not reached the expected level, as a result it has become necessary to sell coins and gold from reserves under the budget rule to support the ruble and budget revenues.
However, already in August, the authorities will return not to selling, but to buying foreign currency and gold, i.e. to accumulating reserves, as revenues will exceed the plan by 73.2 billion rubles, according to the forecast of the Russian Ministry of Finance.