Picture Alliance | Picture Alliance | Getty Images The world’s seven largest industrialized economies have floated the idea of a price cap on Russian oil to further squeeze the Kremlin’s ability to finance its offensive in Ukraine and try to protect consumers amid rising energy prices. The G-7’s pursuit of a price cap on Russian oil is not without challenges, however, with energy analysts particularly skeptical about the integrity of the proposal. For its part, the Kremlin has warned that any attempt to impose a price cap on Russian oil will do more harm than good.
How the idea came about
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The bloc received about 25% of Russia’s oil imports and represented one of the most important buyers for the Kremlin. Cutting off these oil purchases is an attempt to damage Russia’s economy after its unprovoked invasion of Ukraine, but is difficult to end overnight given that some EU countries are heavily dependent on Russian fossil fuels. US President Joe Biden presented the idea of an oil price cap to the rest of the G-7 leaders over the weekend of June 25 and 26, and his counterparts agreed to consider how to do it. The G-7 consists of the US, Canada, France, Germany, Italy, the UK and Japan. German Chancellor Olaf Scholz said the idea was too ambitious and needed “a lot of work” before it could become a reality. A spokesperson for the European Commission, the EU’s executive arm, said in an email to CNBC on Friday: “We share the concerns of the G7 countries about the burden of energy price increases and market volatility and how these are exacerbating national inequalities. and international level. “ “In this context, as mandated by European leaders, the Commission will continue our work on ways to limit rising energy prices, including assessing the feasibility of introducing temporary import price caps where appropriate,” the same spokesman said, adding that discussions are addressed. as “urgent”.
How might a price cap work?
Energy analysts have questioned how exactly the G-7 can impose a price cap on Russian oil, warning that the plan could fail if key consumers are not on board and time may be running out to make it workable. “I’m one of those scratching my head,” Neil Atkinson, an independent oil analyst, told CNBC’s “Squawk Box Europe” on Thursday. “Something like this could only work if you got all the key producers and, importantly, all the key consumers to work together and then find some way to enforce whatever plan you come up with,” he added. “And the reality is that the biggest consumers of Russian oil, or among the biggest consumers of Russian oil, are China and India.” A tanker moored at a natural gas and oil dock in the port of Constanta in Romania. Bloomberg | Bloomberg | Getty Images China and India have “benefited enormously” from reduced Russian crude, Atkinson said. Russian oil is selling at a deep discount of $30 or more to international Brent crude futures at $110 a barrel — and China and India are snapping it up. Atkinson also highlighted the lack of unity over Russia’s invasion of Ukraine, as China and India failed to explicitly condemn the Kremlin. “In any case, the Russians are not going to just sit there and do nothing. They can play games with oil supplies and indeed natural gas … they can mess with the head of the G-7 in some sense, so I think that the plan is really a non-starter,” Atkinson said. Do we really think that Russia will actually accept this and not retaliate? I think this sounds like a very, very good idea in theory, but it’s just not going to work in practice. Amrita Sen Co-founder and Research Director at Energy Aspects “To me, frankly the mechanism is not working,” Amrita Sen, co-founder and director of research at Energy Aspects, told CNBC’s “Squawk Box Europe” on Friday. “They haven’t thought it through, they haven’t talked to India and China… Do we really think they’re going to agree to this? And do we really think Russia is really going to accept it and not retaliate? I think that sounds like a very, very good idea in theory, but it’s not going to work in practice.” Sen said the idea that countries around the world are on the same page as Western policymakers, particularly in relation to energy security, is “the biggest misconception right now”. He added, “I think this really needs to go.” For Claudio Galimberti, senior vice president of energy research firm Rystad, the most direct mechanism for imposing a price cap on Russian oil is through insurance. “The International Group of Protection & Indemnity Clubs in London covers about 95% of the world’s oil shipping fleet. Western countries could try to impose a price cap by letting buyers retain this insurance as long as they agree to pay no more than a specific price ceiling for Russian oil on board,” Galimberti said in a note. “However, there are many obstacles that could derail such a plan,” he added. Among the most obvious examples, Galimberti said, was the fact that Russia could simply decide not to sell at the prices set by the ceiling, particularly if the benchmark is too low and close to production costs. President Vladimir Putin has already indicated his willingness to cut off gas supplies to so-called “unfriendly countries” that have refused to meet his demands to pay for gas in rubles. China is the “next most likely obstacle,” Galimberti said, as Beijing may decide for geopolitical reasons “to offer support to Russia by accepting inferior Russian insurance and thereby facilitate a loophole for the price ceiling.” “Nonetheless, a price cap is certainly a measure worth considering at this stage, although time is running out as the EU is determined to ban Russian oil imports by the end of the year,” Galimberti said.
How did Russia react?
Russia has warned that any attempt to cap the price of Russian oil could wreak havoc on the energy market and push commodity prices even higher. Deputy Prime Minister Alexander Novak on Wednesday described the move by Western leaders to consider a price cap as “another attempt to interfere with market mechanisms that can only lead to market imbalances … which would lead to [a] price increase,” according to Reuters. Novak said he was confident Russia would restore oil production to pre-sanctions levels in the coming months, mainly because a significant amount of Russian crude had been rerouted to Asian markets.
