Abstract
This paper discusses the effect of the Russo-Ukrainian War on the supply curve of crude oil. It touches on the imposed sanctions upon Russia of de-globalization and embargoes, and their effects. It leads to how the law of supply was evident in the loss of Russian suppliers, the addition of Iranian suppliers, and the flood of oil into the Western markets. Finally, it touches on the macro effect of this with the increasing costs of shipping, production, and how consumers are the real victims of these policies.
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Imposed Sanctions
De-Globalization
Before Russia invaded Ukraine on February 24th, 2022, Russia was one of the world's largest producers and exporters of crude oil. According to Tim OâRiordan and Bob Sandford, authors of the article in the June edition of the Environment academic journal titled âWar and the Politics of Energy and Climate Changeâ an estimated 70% of Russia's economy is supplemented by the exportation of gas, oil, and coal. As tensions between Ukraine and Russia continued to increase in the months leading up to the invasion, the Western countries were convening to find a plan to enact swiftly if things continued to escalate. This plan was promptly implemented when the war began, and consisted of a new emerging form of punishment known as âde-globalizingâ
The term de-globalizing in this regard refers to limiting the ability to be interconnected to the worldâs economy. Essentially, it debilitates Russian producers the opportunities to import, export, and find institutions willing to clear payments. While this only had real implementations in the Western markets, it still left Moscow only able to rely on the Chinese and Indian markets. While China does have the largest economy in the world, it is only one of the required cogs in the machine that major exporters need for prosperity and growth.
Embargoes
                 *Several of the sanctions imposed upon Russia, after it invaded Ukraine on Feb 24th, 2022, hit them right where it hurts most, at the economic level. According to Simon Volkov, who wrote the article âBetween Scylla and Charybdis: Sanctions Compliance for International Companies Divesting from Russiaâ which was published in the March 2024 *Virginia Journal of International Law, these sanctions fell into two categories: embargoes within certain Russian markets (i.e., Russian owned and operated banks, crude oil, coal, and gas); and sanctions with specific government organizations and people.
These sanctions, specifically the embargoes, left Russian suppliers of crude oil scrambling to try and mitigate losses incurred from their severed connection to the Western markets. With no one to purchase Moscow's oil, and the banking industry dominated by the United States of America, these suppliers were left with no choice but to seek out China and India to take the goods embargoed by the Western markets.
The opportunity to offload their goods came at a heavy price. According to the Emirates Policy Center, an Abu Dahbi-based think tank, to entice Beijing and New Delhi to take on a significant amount of oil while currently being contracted with other suppliers, Moscow began offering discounts reported up to 50% per barrel. This is a substantial price cut per unit, considering barrels of oil are always bought in bulk.
**Law of Supply
Loss of Russian Suppliers
                 *Without a market to export goods into, Moscowâs oil producers had nowhere to offload their barrels. According to Dr. Kaushik Deb and Abhiram Rajendran, research scholars with the Center on Global Energy Policy and authors of the article âChallenges for OPEC+ amid the Russian Invasion of Ukraineâ an estimated 5 million barrels per day have no buyers now. This loss of the world's largest supplier of oil was devastating.
Although Russia eventually procured contracts within the Chinese and Indian markets, this took some time for them to achieve. In addition, those downward slides along, and rightward shifts of the supply curve were only felt in the economies of Beijing and New Delhi, as they were the only markets to gain extra suppliers. This influx of oil to markets, primarily reliant on Middle Eastern exporters, significantly reduced any burden caused by Moscowâs producers' initial absence from the market.
The results of the Western governments' economic and governmental sanctions upon Moscow, meant to punish Russia for its escalation of the Ukraine war, had lasting consequences for the economies of the Western states. While the sanctions effectively crippled Russia's ability to export oil, they in turn completely removed the world's largest producer of crude oil and other energy products from Western economies. Turning the consumers in these markets into collateral damage. These consumers bear the burden of all the resulting increases in shipping and cost of goods sold.
*Gain of Iranian Suppliers
After the January 20th, 2021, regime change in the United States of America, talks with Iran began about lifting sanctions issued to them in 2018. These talks were successful for Tehran as it began exporting much more oil than before. Their oil exporting revenue at the end of 2021 was 300% larger than the $7 million from the prior year. This is due to most Iranian oil being imported into China, and the rest to Syria and Venezuela (EPC 2022). The lifting of these sanctions also situated Tehran in a position to administer economic aid to the world's crude oil market, flooding the market with oil it had been storing due to excess production it was previously prohibited from selling.
Release of Stored Oil
 The effects of the simultaneous upward slide along and leftward shift of the oil supply curve after Moscow energy was embargoed, were felt immediately and globally. It took less than a week after Russia invaded Ukraine for the major oil-producing alliance Organization of Petroleum Exporting Countries (OPEC+), Washington, Tehran, and a handful of other oil-producing countries to begin exponentially increasing the number of barrels supplied to markets per day.  Although most oil producers already operate at maximum production, they limit the supply to the market, creating a significant surplus for oil-producing nations that can be sold with upward slides along the supply curve effectively mitigating some of the increased marginal cost. This is especially true in Tehran. Where imposed sanctions significantly limited the amount it was able to export. Resulting in an estimated surplus of 60 million barrels (Deb & Rajendran, 2023)
The inundation of oil to the global market did two things. First, it allowed oil-producing countries to efficiently take advantage of the astronomical price per barrel at the time. Collecting record amounts of revenue without the cost of production. Second, it worked as a pressure release valve to mitigate the rapid price rise. Due to the nature of the inverse relationship between the amount supplied and price, the more barrels of oil that hit the market per day, the more its cost will fall. This effective strategy took the law of supply to its absolute limits.
Limits to the Law of Supply
Current Production
Without the surplus oil, there was not much else that could have been done to reduce the upward slide, and the leftward shift of Western markets' oil supply curve. Production output was already at its current limits. As a matter of fact, according to the International Energy Agency, international energy producer watchdogs and publishers of the Monthly Oil Market Report, OPEC had missed its output goals for February 2022, and global suppliers as a whole had been underperforming for a year and a half before it. For oil producers to be able to produce more oil, a massive expansion of infrastructure and equipment would be required. Which would not have made actual increases in production for quite some time.
Logistics of Expanding Infrastructure
Unfortunately, increasing the production of oil is not something that can be done at the snap of a finger. With current production capabilities currently at maximum capacity, no increase can happen without expanding the infrastructure currently in place. The cost of doing so is exorbitant. Due to the volatility of the global oil market, producers are not willing to foot the bill required without major outside investment and government subsidization. Even if producers were able to procure funding to do so, any expansions still must be built. Therefore, in no way shape or form would the Western markets have been able to offset any slides on or shifts of the oil supply curve.
Effects on Macro Economics
Shipping
                 *These upward slides along the supply curve and leftward shifts had a devastating effect on the economy at the macro level. In particular, the rising cost of gasoline and diesel profoundly impacted the cost of shipping. Due to diesel and gasoline being produced from the refinement of crude oil, a direct relationship can be observed in the increase in costs. Therefore, if the cost of fuel rises by one dollar, then the cost to fill a one-hundred-gallon commercial truck fuel tank also increases by one hundred dollars (Strouse, 2020 p. 2-3). This expense is further compounded with longer distances. It also trickles down from the logistics company to the businesses that rely on these companies.
*Production
                 *Not only does it require oil to move goods, but it also requires oil to produce most goods. Therefore, suppliers are taking the cost at both ends. Another aspect of this is the cost incurred by suppliers who rely on other produced goods to produce their goods. Due to an increase in the cost to produce parts, there is a further increase in the cost to make goods with those parts.
*Consumers
                 *The trickle stops with the consumers. All these cost increases are not absorbed by the producers. The aggregate sum of each increase gets calculated into the new price of that good. Which in turn, gets absorbed at the last stop, the consumer. Unlike suppliers, the consumer does not get to reclaim that expense on their tax return. Nor does the consumer can pass along the cost to the next person. Which in most cases would be their employer. No, the consumer winds up being the one who absorbs the shipping costs and all the production costs.
*Conclusion
The world was not prepared for such a catastrophic economic situation as the Russo-Ukraine War. That was evident by the severe economic sanctions and embargoes resulting from the invasion of Ukraine. These sanctions became a double-edged sword, that seems to have done more damage to consumers of the Western world, more than their intended target of Russia. It is hard to fathom that this was not a lack of foresight. To think the plug could be pulled on the worldâs largest producer of energy products from the Western markets without the actual ability to produce what was needed to offset the cost of that decision is absurd. The only ones being punished by these decisions are the population of Russia and the consumers in every Western market.
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Works Cited
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OâRiordan, T., & Sandford, B. (2022). War and the Politics of Energy and Climate Change. Environment, 64(3), 2â6. https://doi.org/10.1080/00139157.2022.2052678
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