Russian oil price cap: how does it work? What consequences – Economic Policy

Russian oil price cap: how does it work? What consequences – Economic Policy
Russian oil price cap: how does it work? What consequences – Economic Policy

The cap on the price of oil exported by Russia, which the members of the G7 announced on Friday that they wanted to put in place “urgently”, is an unprecedented mechanism with uncertain effects, which analysts warn could turn against its designers.

What is this cap?

The mechanism would impose a discount to market pricein order to limit the resources that Russia derives from the sale of hydrocarbons, while maintaining it above the production price, to preserve an export incentive.

The rebate, which would be calculated separately for crude oil and refined products, could be revised regularly, according to a US Treasury official.

Are there any precedents?

Systems have already been developed to prevent a nation from exporting, as is currently the case with Iran or Venezuela, or to limit its exchanges, such as Iraq under the “oil for food” program (1995 -2003), but never before has the international community imposed a differentiated price on a country.

Can the project unite beyond the G7?

The members of the G7 have already limited or even suspended their purchases of Russian oil. To have an effect, the capping project must therefore be adopted by other countries, in priority large customers of Russia such as India or China.

The G7 their holds out the possibility of negotiating lower prices. But “China and India are already buying their oil cheaper” to Russia, recalls Bill O’Grady of Confluence Investment.

“They’re not going to follow” the cap, warns John Kilduff of Again Capital about countries that have so far not participated in the sanctions movement that has targeted Russia since the invasion of Ukraine.

How will Russia react?

For the ceiling to become reality, Russia must comply and continue to export to countries that have adopted the principle. However, the Russian Deputy Prime Minister in charge of energy issues, Alexander Novak, warned Thursday that Russia would no longer sell oil to price cap countries. “As far as restrictions on prices are concerned, (…) we will simply no longer deliver oil or petroleum products to companies or countries that impose such restrictions”, he warned, quoted by the agencies. Russian press.

For John Kilduff, the rise in prices recorded on Friday is also partly due to a negative market reaction to the announcement of the G7, which raises fears of a contraction in global supply and a further rise in prices.

While prices have fallen significantly since the peaks at the start of the war in Ukraine, they remain historically high and extremely volatile.

Does the cap call European sanctions into question?

The European Union (with the exception of three of its members) is preparing to prohibit, from December 5, the import of Russian oil but also to European insurers to cover transport to destinations other than EU.

“Washington is concerned about these insurance restrictions because they would have a major impact“as it stands without the possibility of derogation, argues Bill O’Grady, and would cripple a major proportion of Russian exports.

Around 90% of maritime oil transport is, in fact, carried out by EU and British players, the latter having aligned themselves with the Union’s sanctions.

If the insurance or reinsurance ban comes into force, “Russian exports would really fall”points out Bill O’Grady.

The cap, initiated by the United States before being validated by the G7, plans to exempt from this embargo the transport of cargoes sold at a reduced price, which would, in fact, limit the scope.

What is this cap? The mechanism would impose a discount to the market price, in order to limit the resources Russia derives from the sale of hydrocarbons, while maintaining it above the price of production, to preserve an incentive for export. The drawback, which would be calculated separately for crude oil and refined products, could be revised regularly, according to a US Treasury official. Are there any precedents? Systems have already been developed to prevent a nation to export, as is currently the case for Iran or Venezuela, or to limit its trade, such as Iraq under the “oil for food” program (1995-2003), but never the community has yet to impose a differentiated price on a country. Can the project unite beyond the G7? The members of the G7 have already limited or even suspended their purchases of Russian oil. To have an effect, the capping project must therefore be adopted by other countries, in priority large customers of Russia such as India or China. The G7 makes them dangle the possibility of negotiating lower prices. But “China and India are already buying their oil cheaper” from Russia, reminds Bill O’Grady of Confluence Investment. countries that have not, so far, participated in the sanctions movement that has targeted Russia since the invasion of Ukraine. How will Russia react? For the cap to become a reality, Russia must bends and continues to export to countries that have adopted the principle. However, the Russian Deputy Prime Minister in charge of energy issues, Alexander Novak, warned Thursday that Russia would no longer sell oil to countries capping prices. “As far as restrictions on prices are concerned, (…) we will simply no longer deliver oil or petroleum products to companies or countries that impose such restrictions”, he warned, quoted by the agencies. Russian press releases. For John Kilduff, the rise in prices recorded on Friday is also due, in part, to a negative market reaction to the announcement of the G7, which raises fears of a contraction in world supply and a new increase prices. Although prices have fallen back significantly since the peaks at the start of the war in Ukraine, they remain historically high and extremely volatile. Does the cap call into question the European sanctions? The European Union (with the exception of three of its members) is preparing to prohibit, from December 5, the import of Russian oil but also to European insurers to cover transport to destinations other than the EU. “Washington is concerned about these restrictions in terms of insurance because They would have a major impact” as they stand without the possibility of derogation, argues Bill O’Grady, and would paralyze a major proportion of Russian exports. EU and British, the latter having aligned themselves with the Union’s sanctions. If the ban on insurance or reinsurance came into force, “Russian exports would really fall”, underlines Bill O’Grady. The cap, initiated by the United States before being validated by the G7, plans to exempt from this embargo the transport of cargoes sold at a reduced price, which would limit, in fact, its scope.


The article is in French

Tags: Russian oil price cap work consequences Economic Policy

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