Page 6 - FSUOGM Week 26 2022

FSUOGM COMMENTARY FSUOGM

EXPLAINER: how a price cap on

Russian oil might work

The move is aimed at depriving Moscow of revenues, but it could prove difficult to
implement, and may backfire

GLOBAL EUROPE is scrambling to find alternatives and petroleum products globally, unless the oil
to Russian crude oil, natural gas and coal. But is purchased at or below a price to be agreed in
WHAT: the fact remains that despite recent cuts in the consultations with international partners.”
Brussels and Washington amount that the EU buys from Russia, Moscow’s While the US and Canada have already pro-
are discussing revenues from hydrocarbon exports still surged hibited Russian oil purchases, the EU is yet to
introducing a price cap 40% year on year in May, as noted in a recent take this step until the end of the year, and so the
on Russian oil. study, owing to sky-high prices. This is even tak- price cap is designed to serve as a stop gap.
ing into account the fact that Russia’s Urals oil is The price cap could be set at or close to Rus-
WHY: trading at a steep $30 discount to Brent, because sia’s marginal cost of production, ensuring the
The move is aimed at of sanctions and buyers shunning the product. Kremlin makes no profit from its oil exports. At
depriving Moscow of At the same time, some EU member states have the same time, Russia would have an incentive to
export revenues, at limited ability to make further reductions in keep on exporting the crude, because the alter-
a time when they are volumes. native would be the costly shut-in of fields and
soaring because of high This is why a proposal is now gaining traction the loss of strategic markets overseas, potentially
international prices for in Brussels and Washington to cap the price of causing irreparable damage to its oil industry.
oil, gas and coal. Russian oil imports, depriving the Kremlin of To enforce the price cap, G7 countries and
revenue to finance its war in Ukraine. But this their allies could make it illegal for any bank or
WHAT NEXT: proposal could prove tricky to implement and company in their jurisdiction to support ship-
The cap could prove could have significant negative implications for ments of Russian oil that exceed the price cap.
difficult to implement and the global economy. Russian oil exporters would therefore have to
may well backfire. Leaders of the G7 advanced economies on sell oil at or below the oil and provide verifiable
June 28 reached a broad agreement to find ways proof, or lose access to shipping, insurance, ports
of introducing the cap, but the technical work is and financial services in G7 member states. In
still to come. the case of insurance, for example, the Interna-
“This is a very ambitious and demanding pro- tional Group of Protection & Indemnity Clubs
ject, and there is still a lot of work to be done,” in London covers around 95% of the global oil
German Chancellor Olaf Scholz said at a con- shipping fleet.
cluding press conference. On the other hand, buyers that have main-
French President Emmanuel Macron added tained a more neutral stance towards Russia
that while “the idea to put a cap is a very good such as India would have the incentive of cheap
one, there is technical difficulty.” oil to abide by the price cap. Indian oil refiners
Introducing a price cap on Russian oil might are already securing lucrative deals for discount
also pave the way for a cap on Russian gas prices Russian oil. The threat of secondary sanctions on
as well. those that do not comply with the cap would pro-
vide a stick to complement that carrot.
How the cap would work
The US had initially pushed for a Russian oil Difficulties and dodges
price cap that could be enforced by lifting sanc- For the price cap to work in practice, though,
tions on the insurance of cargo ships that handle there would have to be a clear enforcement
the country’s crude, in return for a price deal. mechanism that avoids confusion and cheating.
Those sanctions would be lifted for countries If enforcement is uneven, then it is likely to create
that agreed only to purchase Russian oil at a set- even greater volatility on the global oil market.
tled maximum price, creating an incentive for Somewhat similar measures were imple-
the price cap to be complied with. G7 leaders mented against oil producers in the past, such
said they viewed this as the preferred option. as the oil-for-food programme by the UN in
“We will consider a range of approaches, 1995 that allowed Iraq to sell oil in exchange
including options for a possible comprehen- for food and medicine. Oil buyers paid money
sive prohibition of all services, which enable into an escrow account run by BNP Paribas,
transportation of Russian seaborne crude oil with some of the funds being used to pay for war

P6 www. NEWSBASE .com Week 25 22•June•2022