The G7 countries recently implemented a price cap on Russian oil, which came around the same time as the EU’s embargo on the oil. These actions could have an impact on Russia’s oil revenues but could also backfire, leading to huge increases in oil prices. Russia’s oil money machine has been printing cash, benefiting from higher energy prices. The West has been trying to slow down this energy revenue but it is easier said than done due to many European countries depending on the energy and oil supplied by Russia. The cap was settled at $60 per barrel, but not all Russian grades of crude oil trade at this price.
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The Impact of G7’s Russian Oil Price Cap
In recent weeks, the G7 countries decided to implement a price cap on Russian oil, coinciding with the EU’s embargo on said oil. The question that arises is whether these actions will have any impact on Russia and if they could backfire, sending oil prices through the roof. This article aims to explore these concerns.
The Role of Oil in the Ukraine War
The war in Ukraine has been ongoing for almost a year, and this is largely because Russia’s oil money machine has been printing cash. As the second-largest oil producer globally, Russia has reaped the benefits of increased oil prices and aggression. According to some estimates, Russia could earn 337 billion dollars in oil exports this year, representing a 38% rise from last year. Due to this, NATO and the West have been trying to limit Russia’s energy revenue.
Discussions Around Embargo and Price Caps
These discussions have been ongoing for several months. The EU’s oil embargo was agreed in May, with 90% of imports from Russia curtailed. However, some European countries managed to secure exemptions, particularly those relying on pipeline imports.
There were concerns around the impact of the price cap on the supply of oil on the market. As the second-largest producer, if Russia curtailed supply, it could lead to a spike in oil prices, resulting in more pain for consumers worldwide.
Implementation of the Price Cap
Despite initial concerns, the G7 countries agreed on a 60-dollar per barrel price cap. This price level was selected because it was not too far off from the price Russia was getting for its oil on the global market. Additionally, it was high enough for Russia to consider supplying oil to countries that signed on to the cap.
However, there were still questions about the efficacy of the price cap, as Russia could root its oil supplies to countries that ignored the cap. This begged the crucial question of why the cap was introduced at all.
Potential Impacts and Challenges of the Price Cap
One of the dominant ideas surrounding the price cap is that countries that did not follow the cap would still have bargaining power. They could name any price above 60 dollars because Russia would not be able to sell above 60 in the G7 and EU. Countries like India and China have used this tactic to get low-priced Russian oil.
Russian crude oil also trades at different prices, and the listed Cap would not apply to all grades of crude. Additionally, some tankers and ships servicing the Russian oil industry come from G7 and EU countries. These firms are prohibited from transporting or servicing any ships or cargo that are carrying Russian crude bought at a price above the cap. This prohibits a steady stream of tankers and ships to get the oil to the market.
It’s quite hard to verify that crude ownership has been bought below the cap. Documents are easy to fake. There is also the potential that shipping Russian oil will not be too impeded, even if shipping companies abide by the cap. This is because Russia could always make separate deals with the customer country.
Russia has a Shadow Fleet that services and transports crude oil from countries subject to sanctions. Examples of these countries include Venezuela and Iran. This Shadow Fleet could continue to service and transport oil, even with the price cap in place. It’s expanding at a rapid pace, with owning companies buying fleets of second-hand tankers.
Final Thoughts
Ultimately, the price cap on Russian oil was an attempt to limit Russia’s revenue from oil exports. However, it is not clear if this will be effective. The cap is only applicable to some grades of crude, and the Shadow Fleet is a real challenge to monitor. The cap could potentially have a limited impact or backfire, leading to more of Russia’s oil being routed to Asia and countries not subject to the cap.
