Effect of Russian oil price cap, ban
FRANKFURT, Germany — Western governments are aiming to cap the price of Russia’s oil exports in an attempt to limit the fossil fuel earnings that support Moscow’s budget, its military and the invasion of Ukraine.
The cap is set to take effect Dec. 5, the same day the European Union will impose a boycott on most Russian oil — its crude that is shipped by sea. The EU was still negotiating what the price ceiling should be.
The twin measures could have an uncertain effect on the price of oil as worries over lost supply through the boycott compete with fears about lower demand from 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:
How it’d work
U.S. Treasury Secretary Janet Yellen has proposed the cap with other Group of 7 allies as a way to limit Russia’s earnings while keeping Russian oil flowing to the global economy. The aim is to hurt Moscow’s finances while avoiding a sharp oil price spike if Russia’s oil is suddenly taken off the global market.
Insurance companies and other firms needed to ship oil would only be able to deal with Russian crude
if the oil is priced at or below the cap. Most of the insurers are located in the EU or the United Kingdom and could be required to participate in the cap. Without insurance, tanker owners may be reluctant to take on Russian oil and face obstacles in delivering it.
Oil flow
Universal enforcement of the insurance ban, imposed by the EU and U.K. in earlier rounds of sanctions, could take so much Russian crude off the market that oil prices would spike, Western economies would suffer and Russia would see increased earnings from whatever oil it can ship in defiance of the embargo.
Russia, the world’s No. 2 oil producer, has already rerouted much of its supply to India, China and other Asian countries at discounted prices after Western customers
shunned it even before the EU ban.
One purpose of the cap is to provide a legal framework “to allow the flow of Russian oil to continue and to reduce the windfall revenue for Russia at the same time,” said Claudio Galimberti, a senior vice president of analysis at Rystad Energy.
Different levels
A cap of between $65 and $70 per barrel could let Russia keep selling oil while keeping its earnings at current levels. Russian oil is trading at around $63 per barrel, a considerable discount to international benchmark Brent.
A lower cap — at around $50 per barrel — would make it difficult for Russia to balance its state budget, with Moscow believed to require around $60 to $70 per barrel to do that, its socalled “fiscal break-even.”
However, that $50 cap would be still be above
Russia’s cost of production of between $30 and $40 per barrel, giving Moscow an incentive to keep selling oil simply to avoid having to cap wells that can be hard to restart.
Observing the cap
Russian has said it will not observe a cap and will halt deliveries to countries that do. A lower cap of around $50 could be more likely to provoke that response, or Russia could halt the last of its remaining natural gas supplies to Europe.
China and India might not go along with the cap, while China could form its own insurance companies to replace those barred by U.S., U.K. and Europe.
Galimberti says China and India are already enjoying discounted oil and may not want to alienate Russia.
“China and India get Russia’s crude at a huge discount to Brent, therefore, they don’t necessarily need a price cap to continue to enjoy a discount,” he said. “By complying with the cap set by the G-7, they risk alienating Russia. As a result, we do believe that the compliance with the price cap would not be high.”
Russia could also turn to schemes such as transferring oil from ship to ship to disguise its origins and mixing its oil with other types to skirt the ban.
So it remains to be seen what effect the cap would have.