Energy: Putin has ‘destroyed his most important market,’ expert says

S&P Global Vice Chairman & "The New Map: Energy, Climate, and the Clash of Nations" author Daniel Yergin joins Yahoo Finance Live to discuss the energy market and why Russia's invasion of Ukraine has damaged the price of Russian oil exports.

Video transcript

SEANA SMITH: The EU agreed to set a price cap on Russian oil exports at 60 bucks a barrel. Diving into the details of this, the agreement allows for a price revision every two months to keep the cap at 5% below the market price.

Joining us now for more on this and some of the other big stories that will likely affect the energy markets here in the coming weeks, we want to bring in Daniel Yergin, S&P Global vice chairman and, also, "The New Map, Energy, Climate, and the Clash of Nations" author. Daniel, it's great to have you. So let's first start with the big news of the day, that $60 price cap on Russian oil. Your reaction to this, and also what you think how Russia could potentially react to this news.

DANIEL YERGIN: Well, I think it's not surprising that it's $60. It was being talked about around $65. The Poles were arguing for $30. And I think 60 is kind of where it's expected to come out. Russia has indicated that it wants no part of this. It doesn't want the US Treasury setting the price of its oil. And the Russians have talked about cutting supplies in which case, in a way, that would be like what they've done in Europe with natural gas. And they may do that, or they may decide at 60, that's kind of what they're earning anyway.

But they say they want no part of it. And so there's a lot of sleight of hand here to make this work, that the Russians will say that the oil wasn't sold under a price cap, but it was. And I think people in the market are still pretty confused or uncertain how is this thing actually going to work. Monday's a historic day when this goes into effect.

DAVE BRIGGS: Will it have any impact, Daniel?

DANIEL YERGIN: Well, yeah, there are two impacts. One, if it actually works, I think it probably has a kind of gravitational pull on the price down. By the way, that's why the other-- the OPEC nations don't like it because they say, well, wait, if the industrial nations are setting the price on Russian oil someday, will they set the price on all of our oil? So you have OPEC+ versus the, sort of, the G7.

But if Russia does do what they threatened to do, to take a million or 2 million barrels a day out of the market, then you'll see a very different price reaction. The one reason they might not do it is because that could hit China and India, which are their friends right now when it comes to oil.

SEANA SMITH: Daniel, you mentioned OPEC. Let's talk about it because the meeting happening on Sunday. Lots of anticipation just in terms of what could potentially come out of the meeting. Are you expecting anything significant?

DANIEL YERGIN: The mainly significant thing that I'm expecting to come out is nothing of significance. It was pretty bruising, that last OPEC+. And I was in Saudi Arabia a couple of weeks ago, and I could see the tension palpable between the US and Saudi Arabia over that. I think at this point, especially with the uncertainty of what happens on Monday, which is both the price cap, and of course, the ban on the import of seaborne Russian crude into Europe, I think that despite the fact that we've heard that the Russians would like a cut in volume right now, that the course that OPEC+ probably will do is have a phone call and do nothing.

DAVE BRIGGS: And the following day, the EU ban on Russian oil kicks in. And the same question, what's the impact of those?

DANIEL YERGIN: Well, what happened is that Vladimir Putin has basically destroyed his most important market for his oil and gas and his coal, which is Europe, because, basically, they don't want any part of it. Right now, coal is a-- gas is a big problem, particularly as it gets colder.

But I think the Europeans, the reason, partly, that this whole price cap came up is because the US looked at the ban that the Europeans were going to do, which is not only the import of oil, but also on shipping and insurance services, and said, holy cow, there's going to be a shortage in the world market, and that will create panic. So let's create this price cap as a mechanism, keep the oil flowing, try and reduce Putin's revenues.

But I think come Monday-- well, I mean, oil that was already contracted will flow in. It's going to be a different market. And the thing to watch is in February, when the same prohibition goes on Russian products, because diesel and products like that are really tight supply, and the impact might even be more serious.

SEANA SMITH: Daniel, let's talk about the impact that we could potentially see here in the US, if any, because crude prices have been under pressure over the last several months. They did, though, end the wekk to the upside. In terms of what you're expecting to see, crude right around 80 bucks a barrel, do you think we'll likely hover here or head higher in the future?

DANIEL YERGIN: Well, I think I've never seen a time before where the price of oil depends on the infection rate of a disease, which is the case of China. And you see the price actually going up or down, depending on whether China's opening up or not opening up.

I think Xi Jinping's government has kind of woken up. They have a problem with these kind of lockdowns. And they're trying to back off from them and get the local people not to be so stringent. And the big hit in the oil market is you're probably missing 700,000 barrels a day of Chinese oil demand. So if China does begin to open up, we'll see the oil price respond on the upside.

DAVE BRIGGS: The price of gas astonishingly here is now below the start of the Ukraine war. How do you account for that?

DANIEL YERGIN: Well, I think it's really the price of crude coming down on this. But it was-- and remember, before the war began, the energy crisis actually began six months before the war. The first release that the Biden administration made out of the Strategic Petroleum Reserve was in November, three months before the war. So before the war began, we already had a pretty tight oil-- global oil market, because of this problem of pervasive underinvestment in new supplies.

SEANA SMITH: And Daniel, just in terms of your prediction for gas prices, then, going forward, as Dave was saying, we certainly have seen a massive move to the downside. We know we're going into what is seasonably not exactly the most, I guess, active driving season are. You confident prices will hover around where they are today?

DANIEL YERGIN: No, I'm not confident. I think if we see China come back into the market, it will change. And I think Monday's a historic day. And it could be very-- some people say this will all work smoothly. But it could be very turbulent and reflected in prices. And you're really predicting, among other things, what is Vladimir Putin going to do. He's already made, obviously, a lot of miscalculations. He can do it again. So in a way, if you think about what happens in the oil market in the next few weeks, a lot depends on the decision-making by one Vladimir Putin and one Xi Jinping.

DAVE BRIGGS: Vladimir Putin arguably the most unpredictable world leader on the planet. Daniel Yergin, good to see you, sir. Enjoy the weekend.