US officials have scaled back a plan to impose a cap on Russian oil prices.
Instead of attempting to restrict Russia’s oil revenues (without leaving western Europe drastically short of oil) the EU and US had hypothesized that, by imposing a strict cap on prices as part of a buyer’s cartel, it could get the best of both worlds.
However, the US and EU now look likely to settle for a more loosely policed cap, and at a higher price than previously planned. In addition, only the G7 nations and Australia look likely to abide by it, although South Korea has privately told G7 nations that it planned to comply, according to reports. There are hopes that New Zealand and Norway will join the cartel, but with India and China almost certain to decline, there is a question whether
the EU’s plan will just see Russia sell its oil at a free market price to Asia, bypassing the price-capping nations completely.
The original US plan, pioneered by Treasury Secretary Janet Yellen, would have seen a price cap in the range of $40 to $60 per barrel. The cap is now thought to be likely to be at the upper end or above.
The White House’s National Security Council said that the price cap remained “the most effective way to ensure that oil continues to flow into the market at lower prices and hit hard at Putin’s revenue to fund his war.”
However, traders, companies and investors remain sceptical, noting that buyers outside the cartel were significant global players when it came to oil purchasing.
Russia earned an estimated $15bn from oil sales in September, and there seems no easy way for the US and the EU to stop this. The global market is not dominated by the US and the EU, which mean that the mechanics of a price cap designed by a minority of consumers, aimed at a single producer, look to be too complicated to achieve.
The US Treasury Department says that setting a higher price cap could make the initiative more likely to succeed.
Russian President Vladimir Putin has said that Russia will not sell oil to anyone who participates in the US-EU price cap. The US originally thought this was bluster, but it is now seen as a viable Russian option.
Doubts about whether the oil price cap would work emerged right at the start of Janet Yellen’s efforts, the view being that the US was overestimating the importance of the US and Europe in the global oil market. These doubts grew significantly at the start of October when the OPEC+ cartel (which includes Russia) said on October 5th that it would be imposing a production cut of 2m bpd.
The final form of the price cap is expected to be announced before December 5th, when EU sanctions are set to go into effect on services such as insurance, brokerage and financial assistance involved in transporting Russian oil to international customers. However, there
were fears that the EU, noted for its last-minute deals, would not give important details until it was too late for various parts of the oil supply sector – including insurers – to react in time.
The EU has said that it as aiming to establish a price cap on or around November 25th.
The Biden administration continued to insist that the price cap would contribute to stability in markets, that it would see Russian oil continue to flow, but at a lower price. However, there are now fears that the price cap could increase rather than decrease volatility in oil process.
The price-cap mechanism adopted by the EU would require third-country buyers of Russian oil to agree to pay less than the cap in order to ship and insure their cargo with Europe-based companies.
This was seen as a strong weapon in the US and EU armoury because much insurance of global oil tankers as sourced from participating countries. Companies that insured Russian oil cargoes at prices above the cap would be subject to the EU’s new sanctions. They include a ban on shipping and a provision that would ban vessels from accessing European services for all oil, regardless of origin, if a tanker transports Russian crude sold above the
cap.
That clause was intended as an incentive for buyers to adhere to the cap.
However, it has slowly been realized that a large “shadow” tanker economy had been emerging over the years as the spread of US sanctions widened. Put bluntly, the Iranian and Venezuelan sanctions has created the opportunity for some tanker owners to operate voluntarily outside the international system. With Russia being added to that list, there are fears that the long-standing international system of oil transport could split in two. Russia could access alternative ships and insurance services, and could decline to export to customers abiding by the cap.
The EU’s price-cap plan is conditional on the G7 adopting it. Any failure by the G7 to reach an agreement would currently see come into force an outright ban on Russian oil services, which the EU adopted in June,
The US had initially thought to strengthen the cap by threatening secondary sanctions against countries that did not abide by the cap. But since this was likely to include India and China, US Deputy Treasury Secretary Wally Adeyemo has publicly ruled out that option as unworkable.
However, EU officials in Brussels have pondered how the cap can work without an enforcement mechanism.
