The US has proposed to cap price of Russia’s oil exports along with other G7 allies as a way to limit Russia’s earnings while keeping Russian oil flowing to the global economy.
The cap is set to take effect from today, the same day when European Union will impose a boycott on most Russian oil.
If there was ever any doubt what the premise of the cap was, it’s now clear: the US and its allies want Russia’s crude to keep flowing.
What is the Russian Oil Price Cap?
The $60 per barrel cap is intended to cut Russia’s oil revenues while keeping Russian crude on the market by denying insurance, maritime services, and finance provided by the Western allies for tanker cargoes priced above a fixed dollar-per-barrel cap.
Without insurance, tanker owners may be reluctant to take on Russian oil and face obstacles in delivering it.
The US-proposed cap aims to hurt Moscow’s finances while avoiding a sharp oil price spike if Russia’s oil is suddenly taken off the global market.
How would oil keep flowing to the global economy?
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.
Russian response to the cap
Russia has said it will not observe a cap and will halt deliveries to countries that do.
It could retaliate by shutting off shipments in hopes of profiting from a sharply higher global oil price on whatever it can sell around the sanctions.
Buyers in China and India might not go along with the cap, while Russia or China could try to set up their own insurance providers to replace those barred by US, UK and Europe.
How can Russia bypass this cap?
Using dark fleet: Russia also could sell oil off the books by using “dark fleet” tankers with obscure ownership, as have Venezuela and Iran.
Blending: Oil could be transferred from one ship to another and mixed with oil of similar quality to disguise its origin.
How does it impact G7?
For countries that join the coalition, it would mean simply not buying Russian oil unless the price is reduced to where the cap is determined.
For countries that don’t join the coalition, or buy oil higher than the cap price, they would lose access to all services provided by the coalition countries including for example, insurance, currency payment, facilitation and vessel clearances for their shipments.
Most insurers are located in the EU or the United Kingdom and could be required to participate in the cap.
Implications of the Oil Price Cap
Inflationary impacts: Initially, traders and the tanker owners would find it difficult. There might be a drop in exports and some shock in the production of necessary commodities.
Energy insecurity: Countries all over the world will have to bear the spillovers effects of the cap. The effect will be more pronounced for developing countries.
Efficacy of the Cap
Non-comprehensiveness: There is no consensus regarding the cap that should be imposed because of internal disputes in the European Union (EU). Moreover, there is no clarity on the price yet.
Dual pricing: It is going to create a dual-price market with an official price and a discounted price. We already know that Russia is already selling oil at a discounted price to India, China, and Turkey.
Global price dynamics: The implications of the sanction on Russia will depend on a number of factors including the World oil prices.
Loopholes of sanctions: Sanctions are difficult to enforce. Earlier sanctions on Russia have not yielded the desired results.
Hurdles to US intentions
OPEC+ price control: Much remains to be seen on the response of the OPEC plus countries, where Russia is a major player.
Lack of consensus: The enforcement of the sanctions would be difficult as there is no consensus among the members.
Impacts on India
The price cap imposed by the G7, EU and which also includes Australia is aimed to force Russia to sell its crude not above $60.
China and India purchased crude at a massive $33.28 discount to Brent, indicating that the prices were well below the price cap imposed this week.
The price cap applies to nations intending to use Western ships and Western insurers—which means it won’t apply to India.
How has India responded?
The US tried to bring India on board with: from asking India to change its uncritical stance on Russia by-
Cutting down oil imports
Stopping defence and other purchases from Russia and
Avoid the rupee-rouble payment mechanism that circumvent their sanctions
India has rejected any “moral” duty to join the price cap coalition.
Conclusion
India has made it clear, through its cabinet ministers, that it will work to ensure energy security of its citizens and will prioritise that over anything else.
