US President Joe Biden and his allies have discussed the imposition of an untested new mechanism aimed at imposing a cap on Russian oil prices. German Chancellor and G7 host Olaf Soltz called the plans “very ambitious” and said much needed to be done to implement them.
What is suggested?
The idea of a price cap is to allow Russian oil to enter markets that have not imposed import bans — especially in lower- and middle-income countries — in order to reduce upward pressure on world oil prices while limiting revenue to . The G7 and the EU have not said where the price cap will be set, saying only that it will be selected jointly with the “international partners”. Analysts have suggested that it could be above Russia’s production costs – but not much higher – to maintain its export incentive. The ceiling will be imposed through an incentive system that the G7 hopes to sign by oil-importing countries around the world. Importers seeking G7 or EU insurance coverage and shipping services that allow Russian oil to be transported must comply with the price cap. U.S. policymakers backed an oil price cap even before the EU decided to ban 90 percent of Russian crude imports by the end of the year. Washington, which banned Russian crude in March, is worried the embargo will push up oil prices. The United States is also concerned about the impact of the EU’s total ban on Russian oil insurance, which came into force this month and which the United Kingdom plans to reflect. EU and UK insurers play a crucial role in the oil markets and without their services it is difficult for any country to obtain Russian marine crude. The Kozmino oil terminal in Russia. According to the G7 proposal, importers who want G7 or EU insurance for Russian oil shipments should meet the price ceiling © Tatiana Meel / Reuters
What are the main obstacles?
As US National Security Adviser Jake Sullivan points out, the proposal is not something that can be “pulled off the shelf as a tried and true method”. The most difficult task, according to an EU official, will be to persuade a sufficient number of countries and large insurance companies to join the system. Helima Croft, an oil specialist and head of global commodities at RBC Capital Markets, said the initiative was based on the assumption that countries such as India, which has seen a significant drop in Russian oil markets since the crisis, would sign access to more cheaper crude.
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Croft also questioned whether it would be possible to set a price low enough to significantly reduce Moscow’s oil revenues, but high enough for Russia to consider it still in its interest to export. In the meantime, the EU will have to adjust the sanctions regime, which is by no means simple, as all 27 Member States must agree to any changes. Russia could also seek to circumvent any insurance bans, analysts say. While Russian oil shipments would be virtually out of bounds for most of the world’s tanker fleet, state-sponsored ships from India and China could be willing to continue trading and Russia could use its own ships.
How will insurers react?
Insurers in the London market, the global hub for shipping insurance, have privately expressed concern about the use of insurance as a enforcement mechanism by banning coverage for shipments in excess of the price cap. Insurers usually do not know the bargain price of a shipment, they say. The EU official said the G7 and EU authorities should play a role in monitoring the price of oil cargo, otherwise insurers could avoid offering any trap data business if they fail to properly enforce the ceiling. If the insurers decided to avoid any legal risks and stay out of the business to fully cover Russian oil shipments, this would trigger Washington fears of even higher oil prices.
What does the oil industry think?
Some oil executives are skeptical. ExxonMobil CEO Darren Woods told the Financial Times that trying to fix oil prices would be a “complicated” challenge. “It is not obvious to me how this mechanism would work,” he said. “In oil and gas, the markets are operating very efficiently and effectively.” The most obvious danger is that Russia refuses to participate and instead escalates what is rapidly evolving into an energy war. Russia’s state-backed gas monopoly Gazprom has already cut supplies to Europe this month. It may be more difficult for Moscow to use the same tactics as oil, which accounts for a larger share of Russia’s budget revenues, analysts say. The cessation of oil production carries serious risks, as the deposits are destroyed if they suspend their operation. However, cutting supplies to boost prices and squeeze Western economies could be a short-term tactic. “We are constantly thinking that the Russians will play happily while the West decides how to limit its imports in an orderly manner,” Croft said. Additional reference by David Sheppard
