Quantity restrictions and price discounts on Russian oil

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 parsimonious 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' surplus. The potential effects on Russian oil profits are massive. In the short run (within the first year), a quantity restriction of 20% yields Russian losses of 62 million USD per day, equivalent to 1.3% of GDP and 35% of military spending. In the long run (beyond a year) new investments become unprofitable and losses rise to 100 million USD/day, 2% of GDP and 56% of military spending. A price discount of 20% yields losses of 152 million USD per day, equivalent to 3.1% of GDP and 85% of military spending in the short run. In the long run, results are largely the same in terms of Russian profit losses, with the addition that investment in the oil sector will be harmed. 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 very strong, should oil importers want to escalate the economic warfare with Russia.