How can Bangladesh avoid a global oil war? | Rare Techy
On October 5, the Organization of the Petroleum Exporting Countries (OPEC) and other oil-producing countries, including Russia, agreed to reduce their oil production by two million barrels per day – which is two percent of the world’s oil consumption. The decision by OPEC+ caused outrage in the West, especially the Biden administration, which warned the Saudi government that its actions could be interpreted as a nod of support to Russia.
The production cut raised oil prices globally to Russia’s advantage, which ultimately undermined European and US efforts to punish Russia. Also a direct attack on US policy efforts to short-circuit inflation at home, and will likely worsen global inflation. According to the head of the International Energy Agency (IEA), tightening the market for liquefied natural gas (LNG) around the world and major oil producers cut supply has put the world in the middle of “the first truly global energy crisis.”
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So why did the oil exporting countries decide to do it?
That’s because, at the beginning of 2022, the price of Brent is close to USD 79 per barrel. After the Russian invasion of Ukraine in February, it suddenly increased to USD 110 per barrel (the highest mark in the last 14 years). In July, we began to see a general reduction in the price of oil, and at the end of September, it fell to USD 85 per barrel, which is very close to the price before the Russian-Ukrainian war. This is when some people think that the situation is normal. But the problem is that, in 2021, oil prices will rise significantly from before because the world economy is just starting to recover from the pandemic. Therefore, USD 85 per barrel is already an inflated price from the pre-pandemic level. In fact, after the pandemic, oil prices rose from almost $20 per barrel to $85 per barrel. And after the war started, it increased even more.
So, from the point of view of oil producers, USD 85 per barrel in 2021 is very good because it is a big increase from the Covid months. But now, prices are down from what they were when the war started, and oil producers are concerned that if this drop continues, then the world will turn into a recession as expected, like when oil prices dropped to USD 20 during the pandemic. , the demand for oil will decrease and they have to sell oil at a very low price of USD 20-30. This is why OPEC+ reduced its production by two percent.
Due to the rise in oil prices since February, Russia actually made more money after the war broke out than before. Russia’s oil and gas revenue from Europe in a normal year between March and July is USD 50 billion. But in 2022, the revenue will almost double to USD 90 billion.
To avoid this, the European Union (EU) has deployed a “price cap strategy” against Russian oil – which could possibly be extended to the Middle East. According to this strategy, EU members only buy Russian oil at a maximum fixed price. But then, Russia can only sell its oil to other countries. Taking that into consideration, the EU has further placed restrictions on the transportation of Russian oil by sea if the contract price for the purchase exceeds the EU’s so-called “ceiling price”.
According to EU Council Regulation 2022/1904, in the case of such oil transported by a ship from a third country, providing technical, financial, insurance, and other services to the ship in question will be prohibited. And they may also not be insured by EU companies or receive funding from individuals or bodies.
How does this change things?
Previously, when ships carrying Russian oil wanted to escape sanctions, they simply lied in China and declared that the oil was Chinese. Meanwhile, shipping companies don’t care about geopolitics as long as they’re making a profit. That’s how China is reportedly selling Russian oil to Europe. Thus, the EU brings their power over insurance companies.
Insurance in the shipping industry is very important, because the value of the ship itself can be very high – even the value of the cargo. So even if shipping companies don’t care about sanctions, they should care about insurance. And interestingly, an international group of 13 marine insurance groups cover around 90-95 percent of the world’s oil shipping fleet – and this group is based in London. So now, the EU is forcing these insurance companies not to issue insurance to ships that buy Russian oil above the set maximum price.
How can this oil war affect Bangladesh?
First, OPEC + will likely continue to cut oil production, which will increase oil prices, leading to recessions in the US and Europe. This will affect all our trade and services with the West. Second, due to the increase in energy prices, taka may continue to shrink and our reserves may continue to decrease. And this will only exasperate our current economic problems. Finally, if the US and the EU succeed in capping oil prices, we will actually benefit, because we will get oil at a cheaper price.
So, should Bangladesh sit back and hope for a final result? The fact that Bangladesh is very concerned about the situation is proven in the fact that on October 26, our foreign minister said that Bangladesh needs a brotherly attitude from Saudi Arabia in meeting its energy needs amid supply disruptions and rising fuel prices due to Russia. – Ukrainian war. Therefore, the government should immediately negotiate with energy exporting countries to make arrangements that are beneficial for Bangladesh.
Meanwhile, the Bangladesh Petroleum Company (BPC) should reduce fuel prices as it has been making profits since August this year – as recently recommended by the Center for Policy Dialogue (CPD) – to ensure that Bangladeshi businesses do not continue to suffer from the increase. production costs. As businesses are aware of the uncertainty ahead, giving them a break by reducing energy prices could boost business and consumer confidence which, at this point, could prove beneficial to our economy.
Eresh Omar Jamal is an assistant editor at The Daily Star. His Twitter handle is @EreshOmarJamal