Agreeing on a Russian oil cap was the easy part. Now it has to be implemented

  • In Business
  • 2022-12-05 09:30:00Z
  • By Quartz
Hundreds of Rail Tank Cars are pictured at the train cargo line of the LOTOS Oil Refinery on June 06, 2022 in Gdansk, Poland.
Hundreds of Rail Tank Cars are pictured at the train cargo line of the LOTOS Oil Refinery on June 06, 2022 in Gdansk, Poland.  

Three months after initiating talks of a price cap on Russian-origin crude oil and petroleum products, the International Price Cap Coalition is turning its words into action.

On Dec. 2, the cohort comprising G7 member states-Canada, France, Germany, Italy, Japan, the UK, the US-the European Union (bar Hungary, which got a special exemption), and Australia set the price of Russian crude oil at or below $60 per barrel.

Read more

  • 3 ways to reduce invisible labor for women at work

  • 36 ways to build a family-friendly culture

The group of the world's most developed economies established the price cap "to prevent Russia from profiting from its war of aggression against Ukraine, to support stability in global energy markets, and to minimize negative economic spillovers of Russia's war of aggression," according to a joint statement.

The new price on Russian-origin crude oil is meant to enter into force starting Dec. 5 For petroleum products from the region, the timeline is Feb. 5, 2023. Two prices for Russia's petroleum-one for high-value and another for low-value refined products-are yet to be announced.

Agreeing on the price cap was the first step of a longer process. The global oil transportation taps can't be turned on and off on a single day of course. To ensure a smooth transition, the price cap will not apply to oil purchased above the price cap, which is loaded onto vessels prior to Dec. 5 and unloaded before Jan. 19, 2023.

But when that deadline is reached, monitoring how the price cap is being honored will be a whole other task.

The effect of a price cap, in the words of US treasury secretary Janet Yellen

What is Russia's reaction to the price cap?

Russia will not accept the cap, Kremlin spokesman Dmitry Peskov said, quoted in Russian state-owned news agency TASS. He added that Russia would conduct an analysis of the agreement and respond after that.

"Starting from this year Europe will live without Russian oil," Mikhail Ulyanov, Moscow's ambassador to international organizations in Vienna, wrote in a Dec. 3 tweet. The next day, he said that Russia's deputy prime minister, Alexander Novak, confirmed that Moscow would not supply oil to countries supporting "anti-market" cap.

Russian oil in the world, by the digits

14%: Share of global crude oil Russia supplies

45%: Oil and gas contribution to Russia's budget in 2021

2%: Small decline in Russian oil production since the invasion

$65-70: The price cap G7 was considering, which would have had little impact because Urals were already selling to Asian countries for around that much

$35: Steep discounted rate Russia offered India in March

40%: Share total sea exports of Urals India purchased in November

103: Shadow fleet of tankers Russia has amassed this year to sell oil and deliver to India, China and Turkey amid Western sanctions

Charted: Russian Urals' price compared to global benchmark Brent


Why do we need price caps if Russian oil imports are banned?

The US, the UK, Canada, Australia, and the EU swiftly introduced import bans on Russian crude and refined products after its February invasion of Ukraine. These bans still stand.

"The price cap-which comes on top of the EU import ban on Russian seaborne crude oil and oil products, and the corresponding bans of other G7 partners-will further reduce the revenues Russia earns from oil…[and] serve to stabilise global energy prices which Moscow's illegal war on Ukraine has inflated," a Dec. 3 EU notification explained.

The price cap applies to Russian oil being transported to third countries. For ships that intentionally violate the price cap, EU operators will be prohibited from insuring, financing and servicing the vessel for 90 days after the cargo purchased above the price cap has been unloaded.

Will the price cap work?

The opaque oil market, with its many nuances, is hard to regulate.

"History has shown that it is possible for the shipping industry to misrepresent or obscure the origin of its cargo," according to the Atlantic Council. The American think tank in the field of international affairs points to exemptions for certain pieces of the Russian production complex, such as the Sakhalin-2 project, which was heavily funded by Japan; and it says the cap doesn't fully address blends that include Russian crudes, suggesting Russian barrels could be manoeuvred through refined or partially refined products.

Moreover, there are several possible workarounds that make the plan less than foolproof, according to Brussels-based think tank Bruegel:

  • Russia could organize its own insurance or use a third country, like China

  • Importing countries could circumvent the price cap through side payments. "Imagine for example that India pays a higher than usual price for arms deliveries from Russia. Could it be proved that this is a side payment for oil? Will the G7 be ready to enforce sanctions if that happens? It seems that the proposed buyers' cartel is not very credible," Bruegel analysts Klaas Lenaerts, Simone Tagliapietra, and Georg Zachmann warn.

  • A less likely but still plausible move would be Russia cuts it oil supply, pushing prices up

One more thing: OPEC+ won't change a thing

On Sunday (Dec. 4), the 23-nation oil cartel in the Middle East decided to stick to the reduced oil production targets it set in October-2 million barrels per day less until the end of 2023. A monitoring committee will meet again in February, and a full-fledged meeting isn't until June.

  • Restaurant menu screens are looking at you to decide what you might want to eat

Click here to read the full article.


More Related News

Funeral held for Belarusian activist killed in Ukraine
Funeral held for Belarusian activist killed in Ukraine
  • US
  • 2023-02-04 15:59:48Z

A funeral for a Belarusian military volunteer and activist who died fighting on the frontlines in eastern Ukraine was held in Kyiv on Saturday. Eduard Lobov...

WHO report on Ukraine health emergency sparks U.S., Russia row
WHO report on Ukraine health emergency sparks U.S., Russia row

WHO Director General Tedros Adhanom Ghebreyesus's report was presented to the organisation's executive board, on which both Russia and the United States sit....

Putin's Men Fear 'Minced Meat' Fate in New Offensive
  • World
  • 2023-02-03 21:29:04Z

Sputnik/Evgeniy Paulin/KremlinRussia's military is preparing for heavy losses ahead in a new offensive, according to a source apparently stationed at a...

G-7, Europe reach deal for price cap on Russian diesel
G-7, Europe reach deal for price cap on Russian diesel
  • World
  • 2023-02-03 19:50:46Z

U.S. Treasury Secretary Janet Yellen said Friday that industrialized countries in the Group of Seven are imposing a price cap on refined Russian oil products...

Putin may have overestimated Russian military
Putin may have overestimated Russian military's own capabilities to capture Donbas by March - ISW
  • World
  • 2023-02-03 16:04:00Z

Russian dictator Vladimir Putin's attempts to seize the entire territory of Donetsk and Luhansk oblasts by March 2023 prove that he is once again wrong about...

Leave a Comment

Your email address will not be published. Required fields are marked with *

Cancel reply


Top News: Business