If you’ve been watching the World Cup, you’ve likely seen Qatar’s ‘No football. No worries.’ ad campaign a million times.
It’s no big secret that Qatar hopes the World Cup will help the country diversify away from oil and gas by boosting its global profile as a business partner and tourist destination.
I mean, it was a shocker when in 2010, Qatar won the bid to host it, beating countries like Australia, Japan, and the US.
Not only had their team never qualified to play at the tournament, but they really had no infrastructure for it.
What’s more, it gets really hot over there…which is why they had to change the dates from its usual June–July time frame to November.
Qatar has now spent a whopping US$220 billion to renovate and build stadiums along with infrastructure and accommodation, which was very scarce. Some friends told me they were having trouble finding a place to stay, so they were looking at staying in Dubai and flying in for games.
But this is the most expensive World Cup of all time…by far.
Just to give you a comparison, Russia’s 2018 World Cup cost them US$11.6 billion, and the one before, in Brazil, cost US$15 billion.
Transpedia calculates the country will need to sell around 3 billion barrels of oil to pay for the tournament…or about 4.4 years of production. But this could be less if oil prices continue to climb.
The truth is that much like the World Cup at this stage, energy geopolitics keep changing, with plenty of power rivalries at play.
And this week, we saw another major move…
A turning point
On Friday, the Group of Seven, along with the European Union and Australia, set a price cap for Russian oil.
The move, which places a price limit of US$60 per barrel for Russian oil, went into effect this Monday, along with a ban from the EU on oil coming in by sea.
The idea is to limit Russia’s profits from oil and its ability to finance its war in Ukraine.
What’s interesting is that the ban also affects EU operators ‘from insuring and financing the transport in particular through maritime routes of Russian oil to third countries’.
As Yahoo! Finance explains:
‘As 90% of the world’s shipping insurance is provided by a group largely based in Europe, the aim is to curb Russia’s oil revenue by limiting how much coverage the insurers can provide — that’s because only those vessels carrying cargo priced below the EU cap can access Western maritime insurance.’
And we are already seeing some effects. Word on the street is that oil tankers have been starting to pile up off the coast of Turkey, which could mean supply disruptions for oil.
The big question is what will be Russia’s next move…and its effect on the price.
Russia has already said it won’t do business with anyone that goes along with these sanctions. They could ban access to pipeline oil (which isn’t affected by the ban) or decrease production to increase prices.
Of course, there are plenty of other factors at play.
The current energy crisis has often been compared to that of the 1970s…except there’s a major difference.
At the time, the US was a major oil importer, and since then, it’s become one of the biggest oil producers in the world as US shale oil has become a big game changer.
In fact, US crude oil exports hit a record high in the week before the price cap came into effect.
But the US has become a major rival…and we aren’t sure how well OPEC plus is taking having a rival setting a price cap for Russia on oil prices. So tensions could rise.
For the moment, OPEC plus is keeping their current production levels.
The big wild card
Oil prices rose slightly after the price cap went into effect. But the price of Brent fell to less than US$80 a barrel after data from the US service sector raised the expectation that the US Fed will keep raising rates.
A recession would decrease demand for oil and push prices down.
But the big wild card here is China.
China is the largest importer of oil, and if China starts to ease COVID restrictions, we could see a major bump in oil demand.
But my point is energy markets are getting more complex and fragmented out there.
Oil supply is looking very fragile and under threat, which is skewing the likelihood of prices staying high…along with inflation.
All the best,
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Selva Freigedo,
For Money Morning
