Quantity restrictions and price discounts on Russian oil

Résumé 0

Following Russia's invasion of Ukraine, Western countries have looked for ways to limit Russia's oil income. This paper considers, theoretically and quantitatively, two such options: 1) an export-quantity restriction and 2) a forced discount on Russian oil. We build a quantifiable model of the global oil market and analyze how each of these policies affect: which Russian oil fields fall out of production; the global oil supply; and the global oil price. By these statics we derive the effects of the policies on Russian oil profits and oil-importers' economic surplus. The effects on Russian oil profits are substantial. In the short run (within the first year), a quantity restriction of 20% yields Russian losses of 62 million USD per day, equivalent to 1.2% of GDP and 32% of military spending. In the long run (beyond a year) new investments become unprofitable. Losses rise to 100 million USD per day, 2% of GDP and 56% of military spending. A price discount of 20% is even more harmful to Russia, yielding losses of 152 million USD per day, equivalent to 3.1% of GDP and 85% of military spending in the short run and long run. A price discount puts generally more burden on Russia and less on importers compared to a quantity restriction. In fact, a price discount implies net gains for oil importers as it essentially redistributes oil rents from Russia to importers. If the restrictions are expected to last for long, the burden on oil importers decreases. Overall, both policies at all levels imply larger relative losses for Russia than for oil importers (in shares of their GDP). The case for a price discount on Russian oil is thus strong. However, Russia may choose not to export at the discounted price, in which case the price-discount sanction becomes a de facto supply restriction.