Setting a ceiling on the price of Russian oil, according to a measure that the Group of Seven announced on Friday that it intends to impose “urgently”, is an unprecedented mechanism with an uncertain effect, and analysts warn that it may turn against its authors.
– What is the nature of fixing the ceiling?
The mechanism imposes a discount from the market price in order to reduce the resources that Russia derives from the sale of fuel, while keeping prices above the cost of production to maintain an incentive to export.
According to a US Treasury official, the reduction, which will be calculated separately for crude oil and refined products, will be reviewed on a regular basis.
– Are there precedents?
Regulations have already been developed to prevent a country from exporting, as is currently the case with Iran or Venezuela, or to limit exchanges, as was done in Iraq under the “oil-for-food” program (1995-2003), but the international community has not yet imposed a different price on a country. What.
Can the project extend beyond the G7?
G7 members have limited or even suspended purchases of Russian oil. But in order for the project to impose a ceiling on the price of oil to have an impact, it must be adopted by other countries, especially by major customers of Russian oil such as India or China.
The G7 is trying to lure the two countries into its initiative by hinting at the possibility of negotiating lower prices, but Bill O’Grady of Confluence Investments notes that “China and India are already buying their oil at a lower price” than Russia.
Referring to countries that have not yet taken part in the sanctions imposed on Russia since the invasion of Ukraine, John Kilduff of Again Capital believes that they will “not follow” a price cap.
– How will Russia respond?
For the price cap to become effective, Russia must comply with it and continue exporting to countries that have adopted this principle.
But Alexander Novak, the deputy prime minister for energy issues, warned Thursday that Russia would not sell oil to countries that set a price ceiling.
“With regard to price restrictions (…) we will not simply deliver oil or petroleum products to companies or countries that impose such restrictions,” he said in comments reported by Russian news agencies.
For John Kilduff, Friday’s price hike is partly a result of the market’s negative reaction to the G7 announcement, which raises fears of a global supply contraction and a new price hike.
Although prices have fallen significantly from the peak recorded at the beginning of the war on Ukraine, they are still historically high and highly volatile.
Does setting a price cap put European sanctions into question?
The European Union (with the exception of three of its members) is preparing to ban the import of Russian oil from December 5, and also to prevent European insurers from covering transfers to other destinations outside the EU.
Bill O’Grady says that “Washington is concerned about these restrictions on insurance because they will have a significant impact” on the situation without the possibility of granting exemptions, and a large proportion of Russian exports will be paralyzed, which will reflect an increase in prices.
In fact, about 90 percent of oil transportation by sea is secured by companies from the European Union and Britain, which have joined European sanctions on Russia.
Bill O’Grady asserts that if the insurance or reinsurance ban goes into effect, “Russian exports will really go down.”