Skip to content
G7 takes huge risk with Russian oil price cap

On Friday, G7 finance ministers agreed to put in place a Russian oil price cap in December and there is a growing chance that this will lead to a natural gas-like oil price boom.

The details of how it will work have not been ironed out, but the philosophy was clarified by Treasury Secretary Janet Yellen in July.

“Russia is going to face a ban on insurance and financial services at the end of the year which will end up locking in between 3 and 5 million barrels, according to our estimates,” she said. “So why should they retaliate against an initiative that allows their oil to continue to flow to world markets at a price that remains profitable?”

The idea was mocked on Friday by Bloomberg’s Javier Blas:

My friends and I have agreed to put a price cap on beer from our local pub. Remember we don’t plan to drink beer there. The pub owner says he won’t sell beer to anyone watching the ceiling, so other patrons, who drink a lot there, say they don’t join the ceiling. Hit

But Ben Harris, assistant secretary for economic policy at the Treasury, directly echoed this reflection. He pointed out – as others have – that the G7 countries control marine insurance and commercial services.

“The G7 dominates the financial and other services necessary for the global oil trade. For example, the EU and the UK provide 90% of the world’s marine insurance. The collective control of these services by the G7 countries gives us the ability to restrict trading above a certain price. This is more like a regulator setting allowable trading conditions than an individual client trying to cut a bar tab.”

So it’s not really a ceiling price. It’s a blockade or essential services to transport crude unless it’s sold at a discount, maybe 30%.

And Russia is locked into these services. Unlike a bartender who can simply drag beer to another customer, Russia faces huge infrastructure and logistical costs to divert oil flowing through Europe to other outlets. The idea that oil will simply be held back is simply not credible.

The bold idea to me is crazy, especially how it gets dismissed so easily, just like Yellen did.

Russia said Friday in the clearest terms that it would see no oil in any country participating in the program. Somehow the US (and the G7) thinks this idea “just isn’t believable”.

This statement came just hours after Russia voluntarily shut down its own natural gas exports via Nord Stream 1. These exports are unsanctioned and have received stratospheric prices. Yet we bet that they will not do the same with oil?

what will be the consequences? Russia produces 10 to 11 million barrels per day and exports 4 to 5 million barrels per day, or about 3 to 5% of world consumption. Doesn’t look like much, does it? Bad. The demand for oil is extremely inelastic. Even long-term imbalances of a few hundred thousand barrels per day have led to oil price spikes. Withdrawing 3-5 million barrels per day for an indefinite period will lead to an oil rush, easily pushing prices above $200/barrel.

There are only three ways for this to go well:

  1. Yellen is right and Russia is eating a big discount on its oil because it needs revenue
  2. Russia and its customers secure tankers and run their own trade
  3. Russia finds another way to get its oil out

In all of these scenarios, this only reinforces the status quo. Goldman Sachs currently has an oil price forecast of $125/barrel for 2023 and assumes a 600,000 bpd drop in Russian oil production due to sanctions and price caps. If somehow Russia continues to supply at current levels, they say that would imply $15 downside. They don’t quantify the upside potential but say that “the potential loss of Russian exports in retaliation creates substantial upside risk to our bullish outlook.”

The West would have little buffer if Russia stopped production. Saudi Arabia has a small peak capacity that could add 1-2 mbpd for a month or two. The American SPR is already exploited but will still have 400 million barrels at the end of October. This could add 1 mbpd for over a year. None of this is enough to make up the shortfall.

So the question is: how much confidence do you have in the G7 leaders?

cnbctv18-forexlive-benzinga -Sp

Not all news on the site expresses the point of view of the site, but we transmit this news automatically and translate it through programmatic technology on the site and not from a human editor.