Page 10 - FSUOGM Week 48 2022

FSUOGM POLICY FSUOGM

Oil price cap deal still proves elusive for EU

RUSSIA EU negotiators ended talks on capping Russian for Russia since it began its invasion of Ukraine
oil prices on November 25 without coming in late February, helping to stabilise its econ-
The clock is ticking, to a hoped-for agreement, as Poland and the omy even in the face of unprecedented sanc-
as Brussels wants Baltic States opposed a proposal that they felt tions and international isolation.
to implement the would have left Moscow with too much revenue The idea of the cap is to prevent shipping,
policy before the EU’s from its crude exports. Negotiations had been insurance and reinsurance companies from
embargo on Russian extended to November 28, but again, no deal handling shipments of Russian oil around the
oil imports comes into was reached. globe, unless it is sold at a price that is the same
force on December 5. The clock is ticking, as Brussels is hop- or lower than the cap. The rationale for its effec-
ing to adopt the policy, which would also be tiveness is that the world’s key shipping and
implemented by G7 members, before the EU’s insurance firms are based in G7 countries. But
embargo on most Russian oil imports comes there are fears that this could lead to significant
into force on December 5. The European market disruption.
Commission is pursuing a cap of somewhere Unlike soaring gas prices, global oil prices
between $65-70 per barrel. This price cap is are now trading at a level that is fairly comforta-
roughly in line with the price that Russia’s Urals ble for consumers, of around $80-85 per barrel,
blend is currently trading at, leading Poland and having fallen substantially over recent months,
the Baltic States to claim that the proposal is too while Urals is selling at a $20-25 per barrel
generous to Russia. discount because of sanctions and reduced
However, analysts have noted that Brussels demand for Russian products. The fear is that
may be seeking to get the legislation in place a price cap could reverse this downward trend.
first, and reduce the cap at a later point. By intro- JPMorgan has warned that oil prices could hit a
ducing a cap straight away that is too low, the “stratospheric” $380 per barrel if Russia retali-
fear is that this could result in an oil price spike ated to the price cap by cutting production by
and market disruption. 5mn barrels per day. A reduction of 3mn bpd
Nevertheless, Poland wants additional sanc- could raise Brent to $190 per barrel.
tions to be imposed, and the introduction of a Brussels’ thinking, therefore, is to ultimately
review mechanism and a price below the mar- set a price that would deprive Moscow of rev-
ket level, Bloomberg reported on November 27. enues to finance its war in Ukraine, but at the
Warsaw has said before that it wants the cap to same time, give Russia sufficient incentive to
be set as low as $30 per barrel. continue pumping crude. The argument in
“If you put the price cap too high, it doesn’t favour of introducing a cap closer to Russia’s
really bite,” European Commission Vice Presi- marginal cost of production, as Poland and
dent Valdis Dombrovskis told the news agency. others have called for, is that Russia would still
“Oil is the biggest source of revenue for the Rus- have enough incentive to continue exporting,
sian budget, so it’s very important to get this as the alternative would be the costly shut-in of
right so it really has an impact on Russia’s ability production at home and the permanent loss of
to finance this war.” strategic markets abroad, potentially causing
On the other side of the debate, Cyprus, irrevocable damage to its oil industry. However,
Greece and Malta, which have large shipping this assumes that the Kremlin’s response will be
industries, think that the cap is too low, and they rational. Moscow could well be willing to hurt
are also demanding compensation for the loss of its own interests significantly, in order to put
business, or more time to implement the plan. pressure on the West to rescind the policy and
make other concessions. Much of Russia’s strat-
Market disruption egy in the Ukrainian crisis so far has followed
Oil export revenues have provided a windfall this way of thinking. ™

P10 www. NEWSBASE .com Week 48 02•December•2022