When the U.S. Treasury Secretary proposed capping the price of Russian export oil to curb Moscow’s revenues, oil prices spiked. The reason was that the price cap, aimed at reducing Russia’s means of funding the war in Ukraine, was seen as a risky move that could prompt Russia to respond by suspending oil exports.
Indeed, Russia’s reaction was quite predictable: Moscow said it would stop exporting oil to countries that enforce the price cap that was embraced by all members of the G7, including Japan, which was granted an exemption from the cap.
Now, six months later, while the European Union debates the level of the oil price cap, skepticism about its effectiveness has grown. The main factor driving this skepticism is the price level being discussed, which is between $65 and $70 per barrel.
According to the authors of the idea at G7, this price level would provide Russia with an incentive to continue exporting crude oil even with a cap in a bid to avoid a shortage. Again, that’s despite Russia’s declaration that it would not export oil to countries enforcing a cap, regardless of its level.
Yet not everyone is on board with that price level. This is why the EU couldn’t agree on the cap on Monday: Poland and two of the Baltic states insisted that the price of Russian oil insured and shipped by Western companies was capped much lower, close to its production cost, which has been estimated at around $30 per barrel.
The problem is that unless the EU agrees on the price cap proposed by the G7, it will have to implement its very own embargo on all maritime Russian crude oil imports into the bloc beginning next Monday. And the problem lies in the fact that an embargo could lead to substantially higher prices for European oil buyers.
In a way, then, the price cap is a form of mitigation of the EU embargo plan, as the FT suggested in a recent report. The cap, the report said, was an attempt by the Biden administration to offset the effects of the embargo on global oil prices.
Yet at the currently considered price level, the cap, while certainly ensuring that Russian oil continues to flow internationally, would fail at its second stated goal: reducing Moscow’s revenues to discourage it from continuing the war in Ukraine.
Indeed, crude oil export revenues constitute a solid part of Russia’s budget revenues, but it could arguably survive without it and continue what it calls its special military operation in Ukraine, as the country’s military history suggests. Be that as it may, analysts seem to agree that the price cap is pretty much toothless, as Energy Intelligence’s Amena Bakr called it in a recent tweet.
“Given Russian oil (Urals) is trading at $60?65/bbl, the proposed price cap is already compliant under prevailing market conditions,” according to Vivek Dhar from the Commonwealth Bank of Australia, as quoted by CNBC.
“Those levels of discounts are certainly in line with what the discounts already are in the market … It’s something that doesn’t seem, as it is placed, like it’s going to have any effect [on Moscow] whatsoever if the price is so high.” Wood Mackenzie’s gas and LNG research director, Massimo DiOdoardo, told the news outlet.
Indeed, Russia’s flagship Urals blend was trading at a little over $50 per barrel on Monday while the EU was discussing a cap between $65 and $70 per barrel, raising understandable questions about the point of the discussions.
In fact, Bloomberg’s Javier Blas put things bluntly in a recent column, saying discussions of both the Russian oil price cap and the gas price cap for the EU were “deeply pointless,” adding that it doesn’t really matter if the caps are effective as long as they are there, and therefore those agreeing on them are seen as “tough on Russia.”
In that, Blas echoed Moscow’s own sentiment on the matter: “Europeans still have very baffling discussions on this [price] cap. They name hardly explainable numbers, it feels like they are just trying to make a decision for the sake of a decision – not for effect, but just for a show that the cap has been introduced,” Kremlin spokesman Dmitry Peskov said this week.
Of course, oil prices could yet move higher after their latest slump caused by the deepening concern about demand in China, which is still fighting Covid. In fact, they could move higher in a few days after the December OPEC+ meeting, which may see a discussion of a further production cut.
Yet for the EU, the matter seems to be more or less settled: Poland is not budging on its demand for a lower cap, and Greece and Cyprus are unlikely to budge on their demand to have their shipping industries protected—hypothetically—via a higher cap.
What this means is an EU embargo on Russian oil, a squeeze on the supply of oil to the EU, and, consequently, higher prices. And higher prices for non-Russian oil may well lead to higher prices for Russian oil, too, as supply gets rerouted. And if Russia sticks to its promise to suspend sales to cap enforcers, it might even end up with greater revenues from its oil.