We are living in a time of unprecedented oil price volatility. On Feb 8, the world oil price (WTI Crude) was a little less than US$90 (3,030 baht) per barrel (dpb), but a month later the price jumped violently to 124 dpb.
Such volatility was blamed on Russia's invasion of Ukraine, which prompted a concerted imposition of economic sanctions on Russia and concern about an oil and gas export embargo.
But a week later, the price of oil dropped to 95 dpb on the back of some good news that the Organization of the Petroleum Exporting Countries (Opec) might increase their oil production to counter the depleted supply from Russia. As of the time of writing, the WTI crude price has risen back to 112 dpb as there is still a possibility that the European Union (EU) might impose a ban on Russian energy exports.
The first question to ask is whether Russia's oil supply is that important. The answer is: Yes, but it is not the end of the world if it is cut off. Russia is the world's second-largest oil exporter with an export volume of 7.8 million barrels per day (bpd), of which about 5 million bpd is crude oil and the rest other oil products. Russia's oil exports account for 10.5% of the global market.
That being said, it's not accurate to say the world cannot live without Russian oil. Moscow may think so, but this is not necessarily the case. Why? Because Opec countries have enough supply to plug the gap.
About two years ago on April 21, 2020, the WTI crude price was at a record low of 11.57 dpb, owing to a demand drop due to the pandemic. The drop in demand prompted Opec+ to cut its oil supply. The agreed plan was to lower its crude oil production by 10 million barrels per day (bpd) beginning on May 1, 2020, for an initial period of two months, then by 8 million bpd from July to December 2020; and later by 6 million bpd from January 2021 to April 2022. However, the production cut of 6 million bpd was later extended to end-September 2022.
Technically, it means that with Opec's members pumping oil at normal capacity, the world would not require a single drop of Russian oil. In reality, several Opec members can pump up oil beyond their "normal" capacity, notably Venezuela, which was barred from exporting oil to the United States by Donald Trump in 2019. Iraq can also pump up almost 1 million extra bpd, while Iran could add an additional 1.4 million bpd once the current embargo is lifted.
Furthermore, with world oil prices now above 100 dpb, previously unprofitable oil wells in the United States and Canada are now being drilled and that supply will start entering the market this summer.
With all these facts in mind, why is the world oil price close to 120 dpb? There are three possible answers. First, core Opec member countries have no incentive to raise production anytime soon as they are enjoying the benefit of high oil prices. Last year, Saudi's Aramco oil company doubled its profit to $110 billion. If the price of oil remains above 100 dpb, Aramco's profit could double again this year.
Second, it takes time to replace Russian oil and gas. The key obstacle is the transportation of oil and gas to buying countries. Russia has an extensive oil and gas pipeline network to serve European customers. That is why 60% of Russian oil exports and 72% of Russian gas exports go to Europe. And that is why some European countries, like Germany, which has no LNG terminal, are so reluctant to impose an oil/gas embargo on Russia.
Third, oil traders are avoiding buying Russian oil and are shifting their sale orders to WTI and Brent oil. It is estimated that about one-third of the Russian oil supply is not being sold due to this self-imposed embargo by oil traders, despite the fact that Russia has offered a discount of 11 dbp over the Brent price. There is speculation that a part of the unsold portion is being unloaded to India at a 25 dbp discount, and payment can be made in rupees.
With or without a full embargo on Russia's oil and gas, the situation will remain tight until the summer until new sources of supply from the US, Canada, Iraq, Venezuela and possibly Iran enter the world market. Before then, it is likely the world oil price will hover around the 120-125 dpb mark. Once the price breaks the 125 dbp level, Opec might review its oil supply controls for fear of a global recession. The Covid-induced recession of 2020 drove the oil price below 20 bpd. Opec will not risk repeating such a nightmare scenario.
So what should the Thai government do to lessen the impact of this on the economy? The Oil Fuel Fund, which is being used to support the prices of retail diesel and cooking gas, is close to bankrupt. As of March 20, the fund was 32.8 billion baht in the red and 61.6 billion baht in debt.
A long-term reduction of the oil excise tax is not the solution, either, as this generates 144 billion baht of revenue a year.
The government should explore a "Windfall Profit Tax". This is based on the fact that oil-importing companies keep three months' worth of stock. For example, the oil sold at retail gas stations in April comes from the stocks of January, February and March. Let's assume the global oil price was 80 bpd in January, 90 bpd in February and 110 bpd in March -- putting the average cost of oil stock at 93.33 bpd.
What would happen if the global oil price rose to 120 bpd in April? Oil importers would make a handsome profit.
Why should they be allowed to enjoy this windfall from the difference between April's retail price (120 bpd) and the average stock cost (93.33 bpd)? Shouldn't this profit be taxed and the money given to the Oil Fuel Fund to support April's domestic retail price?
This is something the government may wish to consider while scrambling to find funding for the bankrupt Oil Fuel Fund.
