FRANKFURT, Germany — Western governments aim to cap the price of Russia’s oil exports in a bid to limit fossil fuel revenues that support Moscow’s budget, its military and the invasion of Ukraine.
The cap is set to come into effect on December 5, the same day the European Union will impose a boycott on most Russian oil – its crude which is shipped by sea. The EU was still negotiating what the ceiling price should be.
The twin measures could have an uncertain effect on the price of oil, as worries about the loss of supply due to the boycott rival fears of a drop in demand due to a slowing global economy.
Here are basic facts about the price cap, the EU embargo and what they could mean for consumers and the global economy:
WHAT IS PRICE CAP AND HOW WOULD IT WORK?
US Treasury Secretary Janet Yellen has proposed the cap along with other Group of 7 allies as a way to limit Russia’s revenue while keeping Russian oil in the global economy. The goal is to damage Moscow’s finances while avoiding a sharp spike in oil prices if Russian oil is suddenly pulled from the world market.
Insurance companies and other businesses needed to ship oil would only be able to process Russian crude if the price of oil is at or below the cap. Most insurers are located in the EU or UK and may be required to participate in the cap. Without insurance, tanker owners may be reluctant to accept Russian oil and face obstacles in delivering it.
HOW COULD OIL KEEP ARRIVING INTO THE GLOBAL ECONOMY?
The universal application of the insurance ban, imposed by the EU and the UK in previous rounds of sanctions, could take so much Russian crude off the market that oil prices would skyrocket, that Western economies would suffer and that Russia would see its revenue increase no matter how much oil it can ship in defiance of the embargo.
Russia, the world’s second-largest oil producer, has already redirected much of its supply to India, China and other Asian countries at cut prices after Western customers shunned it even before the ban on the EU.
One of the goals of the cap is to provide a legal framework “to allow the flow of Russian oil to continue and reduce windfall revenues for Russia at the same time,” said Claudio Galimberti, senior vice president of the analysis at Rystad Energy.
“It is critical for global crude markets that Russian oil still finds markets to sell, after the EU ban comes into force,” he added. “Without that, global oil prices would skyrocket.”
WHAT EFFECT WOULD DIFFERENT LEVELS OF CAPACITY HAVE?
A cap of between $65 and $70 a barrel could allow Russia to continue selling oil while keeping profits at current levels. Russian oil is trading at around $63 a barrel, a considerable discount to the international benchmark Brent.
A lower cap – at around $50 a barrel – would make it difficult for Russia to balance its state budget, Moscow would need around $60-70 a barrel to do this, its so-called “budget balance”.
However, this $50 cap would still be higher than Russia’s cost of production, which is between $30 and $40 a barrel, giving Moscow an incentive to keep selling oil just to avoid having to plug wells that can be difficult to restart.
WHAT IF RUSSIA AND OTHER COUNTRIES DO NOT ACCOMPANY?
Russia has said it will not observe a cap and will stop deliveries to countries that do. A lower cap of around $50 could be more likely to elicit this response, or Russia could shut off the last of its remaining natural gas supplies to Europe.
China and India may not agree to the cap, while China may set up its own insurance companies to replace those banned by the US, UK and Europe.
Galimberti says China and India already benefit from cheap oil and may not want to alienate Russia.
“China and India are getting Russian crude at a huge discount compared to Brent, so they don’t necessarily need a price cap to continue getting a discount,” he said. he declares. “By respecting the ceiling set by the G-7, they risk alienating Russia. Accordingly, we believe that compliance with the price cap would not be high. »
Russia could also turn to schemes such as transferring oil from ship to ship to conceal its origins and mixing its oil with other types to circumvent the ban.
So it remains to be seen what effect the ceiling would have.
WHAT ABOUT THE EU EMBARGO?
The biggest impact of the EU embargo may not come on December 5, when Europe finds new suppliers and Russian barrels are re-routed, but on February 5, when the additional ban on the Europe on refinery products made from petroleum – such as diesel fuel – will come into force. effect.
Europe will have to turn to alternative supplies from the United States, the Middle East and India. “There is going to be a shortfall, and that will translate into very high prices,” Galimberti said.
Europe still has many cars that run on diesel. Fuel is also used for trucking to move a wide range of goods to consumers and to operate agricultural machinery – so these higher costs will be spread across the economy.