Is the world ready for a price cap on russian oil?
The world’s leading countries have already applied several thousand sanctions against russia, making the terrorist country the top exile for economic restrictions in various sectors. However, the main sources of income are still the sale of energy resources. They make up a large part of russia’s budget, and it is now that the G7 and EU countries have agreed to a cap on oil prices. In this blog, let’s understand why it was decided not to completely abandon russian energy carriers and what consequences a price reduction may have for the global economy.
On December 3, the EU agreed on a price cap of $60 per barrel for oil from russia, and following the EU similar measures were applied by the G7 countries and Australia. The price cap may be reviewed every two months and adjusted by 5%. This step will cut the excess revenues to the budget, which will reduce russia’s military capabilities. In practice, this means that if russian oil is sold at a price higher than the established one, a number of restrictions will be applied. This list includes: prohibition of maritime insurance, trade financing and other measures related to the transportation of oil by sea. On the first day after the restrictions were introduced, this created traffic jams of oil tankers off the Turkish coast, because local authorities required the necessary insurance documents.
Restricting oil prices may affect the European energy market, but the effect will be temporary. It will take several months to rebuild supply chains, and European countries began working on this issue long before the new sanctions. A gradual and comprehensive approach should help overcome the crisis and reduce the impact on the region’s economy. The primary aspect here is not even the price, but the actual availability of oil from other suppliers. Parallels can be drawn with the forced withdrawal of gas when russia critically reduced its supply to European Union countries. At its peak, the price of gas reached $3,000 per 1,000 cubic meters. This is why the EU is in no hurry to completely ban Russian oil, this could lead to a shortage until the market is completely restructured.
While everything is clear with the conditional “Western world” — they either dictate their price or buy from other suppliers, for the “East” it is not so simple. It is still difficult to say how major buyers like China and India, who are unlikely to want to join the sanctions, will react, but for them, it remains a good reason to pay less and get more oil. The last “partners” with whom russia did not quarrel may squeeze the maximum out of this situation. Especially against the background of russia’s threats to refuse to sell oil to the countries that will use the price restriction. At the same time, it is already known that the sale of russian oil to Pakistan at a discount is not such a problem. In all likelihood, concessions on other issues will also take place.
After most EU and G7 countries rejected russian oil, they ended up with more than 2 million barrels a day that they need to sell to someone. The terrorist country hopes to sell these products on Asian markets, particularly India and China. In addition, they will need a fleet of tankers to operate without insurance in the West. According to the Financial Times, they are preparing old ships for this, and some of them are already reaching the end of their lives or are under Western sanctions. However, it should be understood that few countries are willing to take this risky step. Would a buyer order a tanker of oil without guarantees of safe delivery? Besides, not every port is ready to accept a ship without insurance in London or Europe.
This year, russian oil was sold at a deep discount at $48 per barrel, so there are several possible scenarios going forward. One of them is a deficit because traders will not be ready for a situation when russian oil may disappear from the market, displaced by other sellers, e.g., OPEC countries. Thus, the reduction of oil production in the russian federation may reach 20% at the beginning of next year.