How the G7 Oil Price Cap Has Helped Choke Revenue to Russia
In early June, at the request of the Biden administration, German leaders held a teleconference gathering of economic officials from the G7 nations with the aim of dealing a heavy economic blow to Russia.
In a series of one-off conversations last year, the Americans sought to sound out their European, Canadian and Japanese counterparts about a rare and untested idea. Administration officials wanted to cap the price of a barrel of oil Russia could sell on the world market. Treasury Secretary Janet L. Yellen announced the plan a few weeks ago at a meeting of finance ministers in Bonn, Germany.
Partly because they did not understand how seriously other countries were trying to proceed, the reception was mixed. But the call in early June left no doubt. US officials said they were fully committed to the idea of capping oil prices, and urged everyone else to get on board. At the end of the month, G7 leaders signed the concept.
As the G7 prepares to meet again in Hiroshima, Japan, this week, official and market data show that untested ideas have contributed to meeting the original two goals since price caps took effect in December. It suggests that The cap appears to force Russia to sell oil at a lower price than other major producers, as oil prices have fallen significantly from levels immediately following Russia’s invasion of Ukraine.
Russian government revenues are dwindling and budget choices are being forced, according to Russian and international agency data, which officials say may be beginning to undermine the war effort. Drivers in the U.S. and elsewhere are paying far lower gas prices than some analysts feared.
Russian oil revenue The International Energy Agency reported last month that March sales were down 43% from a year earlier, despite an increase in total exports. this week, agency reported Revenue in Russia recovered slightly, but was still down 27% year-on-year. Tax revenues from the government’s oil and gas sector are nearly two-thirds lower than they were a year ago.
Russian authorities have been forced to change the way oil production is taxed, apparently to make up for some of the lost revenue. It also appears to be spending government money to start building its own network of ships, insurers and other entities vital to the oil trade, an effort European and US officials say is a clear sign of success. claims.
“Russia’s price cap is working, and it’s working very well,” Deputy Treasury Secretary Wally Adiemo said in an interview. “The money they are spending building this ecosystem to support the energy trade is money that cannot be used to build missiles or buy tanks. It’s about forcing you to make such difficult choices.”
Some analysts doubt that, at least when it comes to revenue, the plan works much like administration officials claim. They argue that the most frequently cited data on the price of Russian exported oil are unreliable. And other data, such as Indian customs reports, suggest that Russian authorities may be using elaborate deceptive measures to circumvent the cap and sell crude at prices well above the cap. they say.
“The Biden administration’s desperation to claim victory by setting a price cap is actually recognizing what isn’t working and actually leading to victory,” said Steve Shikara, an energy economist at Tufts University. We are concerned that it is preventing us from taking possible steps,” he said. wrote About the possibility of avoidance under the cap.
The price cap was devised as a way to avoid the fines announced by the United States, Europe and others on Russia’s oil exports shortly after the invasion. These penalties included a ban preventing wealthy democracies from buying Russian oil on world markets. But early in the war they basically backfired. They drove up the price of all oil around the world, regardless of where it was produced. While higher prices brought record export revenues to Moscow, U.S. gasoline prices topped $5 a gallon, contributing to a decline in President Biden’s approval ratings.
New European sanctions were set to hit Russian oil hard in December. Wall Street and Biden administration economists have warned that such penalties could drive oil out of the market and push prices higher again. So administration officials decided to use the West’s superiority in the oil shipping trade, including how it was shipped and how it was financed, to force Russia into tough negotiations.
Under this plan, Russia could continue to sell oil, but had to do so at a steep discount if it wanted access to Western shipping infrastructure. In December, European leaders agreed to set the cap at $60 a barrel. Other caps were subsequently put in place for various types of petroleum products such as diesel.
Many analysts were skeptical that it would work. A cap that was too punitive could prompt Russia to severely limit the amount of oil it pumps and sells. Such a move could push oil prices higher. Alternatively, the cap may have been too permissive and had no impact on Russian oil sales and earnings.
Neither scenario has happened. Russia announced modest production cuts this spring, but production has continued at roughly the same level it was at the start of the war.
International Energy Agency Director-General Fatih Birol said the price cap was an important “safety valve” and a key policy that would force Russia to sell oil at prices well below international benchmark prices. Russian crude is currently trading between $25 and $35 a barrel cheaper than other crudes on global markets, Treasury officials estimate.
“Russia played an energy card but didn’t win,” Birol said. I wrote in my February report. “Given that energy is the backbone of the Russian economy, it is not surprising that difficulties in this sector lead to wider problems. The budget deficit is soaring because it is higher.”
Biden administration officials say there is no evidence of widespread evasion by Russia, and Chikara’s analysis of the Indian customs report takes into account the rising cost of shipping Russian crude to India, which is embedded in the customs data. says no.
There is no dispute that the world was able to avoid another oil price spike last summer, which was personally the biggest concern for Biden officials.
U.S. drivers spent an average of about $3.54 on gas on Monday. That’s nearly $1 less than a year ago, and 7 per gallon, which some administration officials were concerned about if Cap failed to prevent a second oil shock from an invasion of Russia. far from the dollar. Gasoline prices are a mild comfort to Biden as high inflation continues to stymie support from voters.
After skyrocketing in the months surrounding the Russian invasion, global oil prices have fallen to late 2021 levels. The plunge is partly due to the cooling global economy, which has continued even as large producers like Saudi Arabia cut production.
Falling global prices are partly responsible for the fall in Russian revenues, but not the only one. Sales prices for Russia’s export crude, known as the Urals, have reportedly fallen to twice the world price of Brent crude.
The G7 summit in Japan this week will probably spend less time setting the cap, and instead turn its attention to other joint efforts to curb Russia’s economy and revenues. And the biggest winner by cap decision won’t be at the summit.
“The direct beneficiaries will be emerging market and low-income countries that primarily import oil from Russia,” finance officials said in a recent report.
Officials noted that a handful of countries outside the G7, notably India and China, are using the cap as leverage to pay discounts on Russian oil. Neither India nor China have joined the formal cap effort, but it is their oil consumers who see the lowest price at the cap.