Sanctions on Russia and the Splintering of the World Oil Market

After the West’s imposition of sanctions on Russia’s oil industry, there is a larger share of world oil production under sanction than at any time in decades. Sanctions impose costs on Iran, Russia, and Venezuela by forcing them to sell oil below market prices. However, sanctions also provide benefits to countries that buy cheap oil. China, India, and Turkey have been major beneficiaries of cheaper oil. Sanctions also make oil markets less efficient and more opaque. Policymakers must calibrate current and future oil sanctions to maximize cost imposition on adversaries while limiting the extent to which they make oil markets more inefficient. Read the PDF. Introduction Since Russia’s invasion of Ukraine in February 2022, Western governments have imposed a complex set of embargoes and sanctions on Russia’s oil industry. While the US and its allies have long used sanctions as a tool of economic statecraft against oil exporters, the sanctions on Russia target one of the world’s two largest exporters (the other being Saudi Arabia). Moreover, these sanctions come after two decades in which the US has imposed sanctions on other significant oil exporters, including Venezuela and Iran, limiting these countries’ production and export capabilities too. This report explores how the sanctions on Russia have affected the world oil market. It has three primary findings. First, a larger share of world oil production is under some form of Western sanction today than at any point in a half century. Second, sanctions have caused a significant shift in oil export patterns, rerouting trade flows in an economically inefficient manner and forcing sanctioned countries such as Iran, Russia, and Venezuela to sell crude at below-market prices. Third, the primary beneficiaries of discounted sanctioned oil are China, India, Saudi Arabia, and Turkey, which can buy oil at below-market prices. We estimate that sanctions on Russian crude oil exports have reduced the import bill of buyers of sanctioned crude by as much as $22 billion over the past year, relative to where prices would have been without discounts to market benchmarks. This calculation excludes discounts on Russian refined product exports, also covered under the price cap, which would likely increase the discount substantially. Sanctions on Russian, Iranian, and Venezuelan crude have created a total discount of as much as $34 billion over the past year relative to traded benchmarks. Sanctions have splintered the world oil market into “sanctioned” and “non-sanctioned” spheres. This imposes costs on sanctioned countries while offering benefits for countries such as China and India that transact in both sanctioned and non-sanctioned energy markets. Analysis of this partial splintering of the oil market provides new empirical evidence about the impact of current and potential future sanctions. Studying the oil market’s fracturing also provides a glimpse into potential futures for markets for other minerals such as lithium and cobalt that are being reshaped by competition and restrictions imposed by China and the West. Read the full report.