G7 leaders have been considering a cap on Russian oil prices since this spring as a way to reduce Moscow’s fossil fuel revenues without triggering a surge in global oil markets.
On Friday, the finance ministers of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States gave the go-ahead to the scheme, saying it would “broaden and expand the scope of existing sanctions.”
Officials stress that there is still a lot of work to be done before the price cap can be enacted, however, with key questions remaining, including the level of the ceiling.
The success of the proposals will depend on the willingness of major importers of Russian oil, including India and China, to go along with the plan. At the moment, neither country has been willing to participate. Russia has warned that it would retaliate against any country involved by withholding oil shipments.
What has the G7 agreed?
G7 countries have agreed to end a “comprehensive services ban” allowing the transport of crude oil and petroleum products from Russia. These services, which include shipping insurance, would only be allowed if products are purchased at or below a price set by a “broad coalition of countries.” The concept has been strongly advocated by US Treasury Secretary Janet Yellen.
The idea of a price cap is to allow Russian oil to reach markets that have not imposed import bans, particularly low- and middle-income countries, while limiting the upward pressure on world oil prices which limits Moscow’s ability to finance its war against Ukraine.
Importers wanting G7 or EU insurance coverage and shipping services that allow Russian oil to be transported should observe the price ceiling. A senior US Treasury official said the plan would involve setting a price cap for crude oil and two other price caps for refined products.
How does the current sanctioning regime affect it?
The cap mechanism would not replace the G7 countries’ existing embargoes on Russian oil, but would be implemented at the same time, taking effect on December 5 for crude and February 5 for refined products.
A senior US Treasury official said the Office of Foreign Assets Control would release guidance on how the price cap would be implemented in the US, although the specific price would not be revealed until closer to the date effective
Washington’s goal is for a large number of non-G7 countries to adhere to the price cap, but officials stressed that even if no other government agreed, buyers of Russian oil producers around the world were already demanding, and would continue to demand, discounts on their purchase contracts because of the looming limit.
“In my conversations with other countries, I’m told that Russia is aggressively out there trying to lock in long-term contracts now at lower prices,” a senior US Treasury official said. “Even if they haven’t decided to join the price cap coalition, part of their conversation with the Russians is, ‘well, given the price cap coming up, how should we think about lower prices ?”.
EU implementation will require member states to unanimously agree to amend the sixth package of sanctions that detailed the bloc’s embargo on Russian crude, including adjusting its ban on insurance services. This sanctions package was reached in May after laborious negotiations. The main holdout, Hungary, secured compensation for Russian oil delivered by pipeline.
What has happened to Russian oil exports recently?
Russian oil exports fell by around 1 million barrels a day following the invasion of Ukraine in February, as many buyers in Europe self-sanctioned and limited purchases amid public outcry. But while the International Energy Agency warned that Russian output, normally above 10 million b/d, could decline by 3 million b/d in a few months, it has proved more resilient, thanks in India
Before the invasion, India hardly imported any Russian oil. It imported nearly 1 million b/d of deeply discounted Moscow crude in July, or about 1 percent of global supply, according to Vortexa, which tracks shipments.
Russia’s ability to maintain exports has helped world oil prices fall from around $120 a barrel in early June to around $95 a barrel, or roughly their pre-war level.
Because Russia produces more than 10 percent of the world’s oil supply, officials in the US and Europe are concerned about penalizing its barrels off the market. The loss of a quarter of Russian supply could cause oil prices to rise.
What are the risks with the maximum price?
Russia could decide to export less oil. Moscow has been accused by the West of “weaponizing” gas supplies by reducing flows to Europe. While gas export volumes have fallen, Moscow’s revenues have increased as gas prices have soared.
Russia may turn to the same playbook in the oil market and reduce supply while raising world prices.
But US officials believe a substantial reduction in oil production would cripple Russia’s production capacity. Closing fields can damage reservoirs. When the Soviet Union collapsed, Russian oil production plummeted from 10 million barrels a day to 6 million. It took more than 20 years to restore production above 10 million b/d.
Russian exports could also fall if they cannot find enough tankers willing to operate without Western insurance. The G7 countries are responsible for 90 percent of all global shipping insurance, and Russia exports almost 8 million b/d of crude and refined products, requiring a large number of vessels.
How will insurers react?
Allowing insurance cover for loads below the price cap means the penalty is not the total ban on insurance that EU and UK officials had agreed to in May.
But the involvement of the wider G7 means that a large majority of shipping insurance markets would be within reach, making it difficult to overcome the ban. Different jurisdictions would be aligned, which insurance experts say is crucial to underwriting risks in what is a global industry.
recommended
Still, industry executives have expressed concern about combining a price cap with an insurance ban. They worry that it would be relied on to provide, or take away, cover for oil shipments that exceed the limit.
A senior market person at Lloyd’s of London, speaking on condition of anonymity, said there needed to be a “recognition that insurers are nowhere near the price at which oil is trading”.
“Requiring insurers to suddenly step in and get that information … people just wouldn’t do it [offer insurance] on the basis that they would be too worried,” the person added. Instead, insurers would seek to get those trading the oil to commit to complying with the price cap, they said.