The G7 ponders capping oil prices to deny Russia revenues. How would it work?

Leaders of a group of seven countries meeting in Germany are looking for new ways to curb Russia’s finances while limiting harm to the Western economy, and about imposing caps on the prices paid for Russian oil. We are discussing. The details of the plan are still under debate, but the idea is to limit how much income Russia can earn from the oil it sells, while maintaining adequate supply to the market.

Despite Russia’s sanctions imposed by the West after the invasion of Ukraine, Moscow still earns significant income from oil, so price caps are being considered.

Russia’s production has fallen by about 8% since the beginning of the war, but prices have risen, creating a stable cash supply to support the government. Crimping that revenue stream is the goal of the G7 conference.

How does the price cap work?

The United States and other countries are looking for ways to limit Russia’s oil revenues while avoiding removing crude oil from the market. This can increase the price. Energy prices have contributed to the sharp rise in inflation, and the Byden administration has said that recent European plans to ban about 90% of Russia’s oil exports by the end of the year could lead to higher gasoline prices. I am concerned.

The White House seems to be trying to find a magic bullet that will punish Russia without raising oil prices or putting further pressure on consumers in the United States and elsewhere.

It remains unclear how the cap works, and there is more speculation than details. One of the approaches that may be applied is to put pressure on Western banks, insurance and shipping companies involved in Russia’s oil transport to reduce prices.

Which countries are likely to go and which are not?

Countries that are likely to support price caps include the United States and Canada, which have already banned Russia’s oil imports. The European Union, which is phasing out Russian crude oil, may also be willing to sign on.

But it leaves many other countries that are much harder to influence.

James Davis, director of consulting firm FGE, said:

Price caps can run into resistance from some of Russia’s major customers. Since the war in Ukraine began in February, India has emerged as a major buyer of Russian crude oil. Purchasing by Indian refiners averaged only 100,000 barrels per day in 2021, but has recently surged to about 1 million barrels per day.

China and Turkey are also major customers, taking advantage of discounts on Russian crude oil. None of these countries have agreed to support Western sanctions on Russia’s oil and there is no guarantee that they will support the new measures being discussed. For example, China may be happy to buy oil at a lower price, but analysts say it prefers to negotiate its own terms rather than apply Western price caps.

There may also be disabilities in Europe. Twenty-seven European Union member states are still Russia’s largest customer, and despite sanctions, May imports were at the same level as in 2021. Negotiations that led to an agreement to reduce Russia’s imports were tricky, and Hungary insisted on a landlocked exemption. Brussels will carefully resume the transaction.

Can Russia resist?

Russia is forced to find a new market for oil, but it is not the power spent on either energy or geopolitics. It continues to be a major oil and gas exporter in a very tight market and has other geopolitical influences, such as its role as a major arms supplier to India. There are many ways Russia can use this influence to frustrate price caps. For example, we may further tighten or stop the supply of natural gas to Germany and other EU countries, or rely on India to continue to buy crude oil.

Will the price limit lower oil prices?

The details of the plan are still unclear, but analysts are skeptical that it will have a significant impact on prices, which are likely to be determined by global supply and demand. For example, Brent crude rose about 1.5% on Monday to about $ 115 a barrel as the G7 debate progressed.

Analysts say there are several reasons for the current highs. They include concerns about lack of power capacity and rock bottom storage tank levels. Concerns about supplies from Russia also contributed.

“Russia’s oil price cap will not change that significantly to lower prices,” Davis said.

Does the price cap lead to market distortion?

Depending on where the price is set, refiners in countries such as India and China may have an advantage over competitors in Europe and elsewhere. Low prices can also stimulate additional purchases of Russian oil, and countries that ban Russia’s crude oil may pay more than countries that participate in price caps.

Will pressure on Russia’s oil industry increase?

It seems likely. According to analysts, as the war in Ukraine prolongs, Western nations appear to be tightening sanctions against Russia, similar to what was imposed on another major oil-producing country, Iran. It may be. There is no doubt that the United States is becoming more and more influential in deciding which countries can produce how much oil. Still, I’m skeptical about how effective the moves under discussion are.

“If the United States is really determined, we may be able to push for a watered-down version of the price cap,” said Richard Bronze, head of geopolitics at market research firm Energy Aspect. “But it’s unlikely that it will actually have a big impact on the flow.”