The goal set by G7 leaders in the Bavarian Alps on Tuesday was ambitious: to prevent Russia from benefiting from its “war of aggression” on Ukraine, which has raised energy prices while minimizing economic damage everywhere. of the world caused by the rises.
U.S. President Joe Biden and his allies discussed imposing a new untested mechanism that seeks to impose a cap on Russian oil prices. German Chancellor and G7 host Olaf Scholz called the plans “very ambitious” and said many things would have to be done to make them happen.
What is proposed?
The idea of a price cap is to allow Russian oil to reach markets that have not imposed import bans, especially in low- and middle-income countries, to limit upward pressure on world oil prices. , while reducing revenues in Moscow.
The G7 and the EU have not indicated where the price cap would be set, saying only that it would be chosen jointly with “international partners”. Analysts have suggested that it could be above the cost of production of Russia, but not too high, maintain its incentive to export.
The ceiling would be imposed through an incentive scheme to which the G7 expects oil-importing countries around the world to subscribe. Importers who want G7 or EU insurance coverage and shipping services that allow the transportation of Russian oil should look at the price ceiling.
U.S. policymakers advocated a cap on the price of oil even before the EU decided to ban 90% of Russian crude oil imports by the end of the year. Washington, which banned Russian crude in March, is concerned that the embargo will drive up oil prices.
The United States is also concerned about the impact of a total EU ban on Russian oil insurance, which was enacted this month and which the UK has planned to reflect. EU and UK insurers play a key role in oil markets, and without their services it is difficult for any country to receive Russian maritime crude.
The Russian oil terminal in Kozmino. Under G7 proposal, importers wanting G7 or EU insurance for Russian oil shipments should observe price cap © Tatiana Meel / Reuters
What are the main obstacles?
As U.S. National Security Adviser Jake Sullivan stressed, the proposal is not something that can be “taken off the shelf as a proven and true method.”
The most difficult task, according to an EU official, will be to convince a sufficient number of countries and large insurers to subscribe to the program.
Helima Croft, an oil specialist and head of global commodities at RBC Capital Markets, said the initiative was based on the assumption that countries like India, which has significantly increased their purchases of Russian oil at a discount since beginning of the crisis, they would adhere to access to an even cheaper crude.
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Croft also questioned whether it would be possible to set a price low enough to significantly reduce Moscow’s oil revenues, but high enough because Russia felt it was still interested in exporting.
In the meantime, the EU should adjust its sanctions regime, which is far from straightforward as all 27 member states have to accept any change.
Russia could also try to evade any insurance ban, analysts say. While Russian oil cargoes would effectively be out of bounds for most of the world’s oil fleet, state-backed ships from India and China could be willing to maintain trade and Russia could use the their own ships.
How will insurers react?
Insurers in the London market, the world center for maritime insurance, have privately expressed concern about using insurance as a enforcement mechanism by banning the coverage of cargo that exceeds the price limit. Insurers usually don’t know the commercial price of a charge, they say.
The EU official said the G7 and EU authorities should play a role, monitoring the price of oil cargoes, otherwise insurers could avoid offering any business given the inconveniences if they do not properly implement the limit.
If insurers decide to avoid any legal risk and stay out of the business of fully covering Russian oil shipments, this would fuel Washington’s fears of an even higher oil price.
What does the oil industry think?
Some oil executives are skeptical. ExxonMobil CEO Darren Woods told the Financial Times that trying to set oil prices would be a “complicated” challenge. “It’s not obvious to me how this mechanism would work,” he said. “In oil and gas, markets work very efficiently and effectively.”
The most obvious risk is that Russia refuses to participate and instead heats up what is fast becoming an energy war. Russia’s state-backed gas monopoly Gazprom has already cut supplies to Europe this month.
It may be more difficult for Moscow to use the same tactics with oil, which accounts for a larger proportion of Russia’s budget revenue, analysts say. Stopping oil production poses serious risks, with fields damaged if operations are suspended.
However, cutting supplies to raise prices and tightening Western economies could still be a short-term tactic. “We continue to think that the Russians will play happily while the West decides how to reduce their imports in an orderly manner,” Croft said.
Additional report by David Sheppard