Russian Oil Prices
Brent continued to unravel last week, closing on Friday at $81. Accordingly, Urals has also fallen just below $70 for the first time in two months. A lower Urals price is good for Ukraine, although it remains well clear of the $60 Price Cap.
The Urals discount -- the difference between Brent and Russia's western crude oil export price -- narrowed to $10.00 / barrel last week, but this is likely an artefact of reporting disparities between Brent and Urals. Expect the discount to widen to $13.50 as Brent stabilizes.
The EIA issued its November estimate of Russian oil production this past week. The Russian oil supply has been revised up 0.1 mbpd across the board starting in September 2022. Such revisions are not unusual for the EIA and are minimal considering uncertainties about Russian oil production during this wartime period. At 10.6 mbpd, Russia's October oil production was 7% below its pre-war output and 11% below the EIA's pre-war forecast for the month of October. As last month, the EIA expects no further reductions in Russian oil output, and indeed, sees Russian supply increasing by 0.15 mbpd (+1.4%) heading into 2024.
The Price Cap and Illegal Immigration
The new Speaker of the House, Mike Johnson (R, La), finds himself in a precarious situation. On Saturday, he unveiled a proposal to avoid a partial government shutdown by extending government funding for various programs until Jan. 19 and Feb. 2, according to the Associated Press. The bill excludes the funding for Israel and Ukraine which the Biden administration has requested. Johnson defended the bill as placing the "conference in the best position to fight for fiscal responsibility, oversight over Ukraine aid, and meaningful policy changes at our Southern border.”
Thus, funding for Ukraine has become intertwined with illegal immigration. Since evading the Price Cap and illegal immigration are the same problem in economic terms -- both are black markets -- they can be addressed with similar approaches.
Black markets arise as a result of prohibitions. A prohibition occurs when a government attempts to prevent willing buyers from transacting with willing sellers at market prices. Illegal immigration exists because the demand for US work visas is vastly greater than the supply of those visas at the offered price of $190. Therefore, unskilled labor from Latin America and elsewhere has an incentive to jump the US border, knowing that willing buyers -- US businesses -- are waiting to purchase the migrants' labor at 4-7x the wages of their home countries. That's illegal immigration in a nutshell.
The Embargo and Price Cap on Russian oil are essentially similar. The Russians want to sell, and global refiners want to buy, Russian crude at market prices. The Embargo and Price Cap are intended to prevent such transactions. Neither has succeeded. The Embargo has led to a simple restructuring of oil trade flows, with India, China and Turkey replacing Europe as Russia's primary export market. Similarly, the Price Cap has motivated Russia to circumvent such controls, for example, by the establishment of its own 'shadow fleet' of tankers and fraudulent declarations by market participants regarding agreed oil prices. This was entirely predictable, as enforcement-based approaches fail almost without exception, regardless of the product, country or historical period.
The US does, however, have three examples of success in ending black markets: the repeal of Prohibition for alcohol; the legalization of gambling; and the partial and halting legalization of marijuana. This is not the place to dwell on particulars, but the graph below illustrates the potential of the legalize-and-tax approach. In Fiscal Year 2023, border apprehensions of illegal immigrants were running six times the level of the Obama administration, and Border Patrol seizures of hard drugs like cocaine, heroin and fentanyl were twice their Obama-era level. By contrast, Border Patrol seizures of marijuana at the southwest border are running at 1.8% -- that's right, 1/55th -- of the level of the Obama administration. Smuggling of cannabis over the Mexican border has all but ended, and in fact, today the US is a net smuggler of marijuana into Mexico by value. That's the power of the legalize-and-tax approach, and we can use it to both close the border to illegal immigration and reform the Price Cap.
If the Speaker and the Republican conference are looking for alternatives, a legalize-and-tax approach can work for both border control and Ukraine funding.
The Republicans can require the Biden administration to begin a formal assessment of a legalize-and-tax approach to border control. This would avoid creating an obstacle to passage of a Continuing Resolution while initiating the first, crucial step towards ending illegal immigration using the proven, textbook approach. President Biden can agree to such a proposal, for it would help his re-election prospects as well. I would note that the legalize-and-tax approach to end illegal immigration has been endorsed by the Washington Examiner and received constructive support from the likes of Breitbart and the Epoch Times. The hard right is willing to take a look, and that should provide some comfort to Republicans as they consider options.
Meanwhile, Republican requirements for oversight of Ukraine spending are far too modest. The principal goal should not be Ukrainian accountability (although this is desirable), but rather making the Russians pay for the war, and not only the war, but Ukraine's reconstruction and the full spectrum costs incurred by the US and Ukraine's allies for the conflict. It's not about ensuring US taxpayer money is well spent; it's about making sure the taxpayers get their money back.
General George Patton, America's most prominent general of World War II, once famously declared, "No bastard ever won a war by dying for his country. He won it by making the other poor dumb bastard die for his country." A legalize-and-tax approach can make the other poor dumb bastard pay for the war. That's something Democrats and Republicans can both support.