‘Dark’ oil shipping impacts inflation – paper

Global inflation dynamics are being impacted by the large volumes of crude oil shipped undercover to avoid sanctions, new research finds.

A working paper published this week by the US National Bureau of Economic Research uses a novel method to track ships even when they switch off their automatic identification system (AIS). AIS is typically required by law for large ships. However, “dark” ships switch it off to avoid being traced when travelling to prohibited areas or engaging in ship-to-ship transfers to evade sanctions.

Researchers from universities in China, the UK and the US use a form of machine learning to identify behaviour associated with dark oil tankers. The model uses vessel-specific details, movement characteristics and trip-level data from AIS to identify when a ship is likely to be transporting sanctioned oil.

The method enables the researchers to estimate the macroeconomic effects of dark oil shipping. They find that dark shipments accounted for nearly 43% of seaborne oil from 2017 to 2023. Although tougher sanctions reduce the amount of oil reported as being traded, oil prices fall in aggregate due to more oil being shipped covertly at reduced prices.

The imposition of sanctions therefore cuts the price of oil for those countries that are willing to accept dark ships. China is the biggest beneficiary of cheap sanctioned oil, most of it exported from Iran and Russia but also from Syria and Venezuela, the paper finds. South Korea, India, Egypt, Turkey and Russia itself also import large volumes of dark oil.

When sanctions are tightened, the macroeconomic impact varies by region, the paper says. For the US, a net exporter of oil, a greater supply of sanctioned oil initially cuts oil prices, triggering a short-run contraction in both the energy and non-energy sectors. However, the US simultaneously benefits from cheaper goods imported from China, where production costs are lowered by cheap oil. The result is supply-driven growth and deflationary pressure in the US.

For the European Union, a net oil importer, higher oil import prices six months after the sanctions shock lead to a drop in industrial production. However, demand for cheaper Chinese goods rises, leading to a net increase in output and a demand-driven rise in producer price inflation.

The researchers emphasise that China is critical to spreading the economic effects of sanctions: “China absorbs the largest share of discounted dark-shipped oil and is a key trading partner for both the US and the EU. This positions China as a central hub in propagating these shocks.”

Central bankers are increasingly alert to the “geoeconomic” effects of geopolitical fragmentation. Speaking on February 14 at an International Monetary Fund event, the Netherlands Bank president Klaas Knot said he saw it as the job of central bankers “to try to limit the economic cost of the current global political climate”.

Knot called for EU countries to draw closer together and co-operate better on the internal market, banking union and capital markets union.

“But beyond that, it has become clear that we have to work closer together in many other fields as well: in defence, energy, healthcare, etc,” Knot said. “We have to work to bring the non-EU countries that share our values closer to the European Union.”