FRANKFURT, Germany (AP) — Western governments aim to cap the price of Russian oil exports in an attempt to limit the fossil fuel earnings that support Moscow’s budget, its military and its invasion of Ukraine.
The restriction is due to take effect on December 5, the same day the European Union will impose a boycott on most of Russia’s oil – its seaborne crude. The EU was still negotiating what the price ceiling should be.
The twin measures could have an uncertain effect on oil prices as concerns about lost supply due to boycotts compete with fears of lower demand due to a slowing global economy.
Here are the basic facts about price caps, the EU embargo, and what they could mean for consumers and the global economy:
WHAT IS THE PRICE LIMIT AND HOW WOULD IT WORK?
US Treasury Secretary Janet Yellen proposed the cap with other Group of 7 allies as a way to limit Russia’s earnings while keeping Russian oil in the global economy. The goal is to damage Moscow’s finances while avoiding a sudden spike in oil prices if Russian oil is suddenly taken off the global market.
Insurance companies and other firms required to supply oil could only deal in Russian oil if the price of oil is at or below the ceiling. Most insurers are based in the EU or UK and may be required to participate in the limit. Without insurance, tanker owners may be reluctant to take on Russian oil and face obstacles in delivering it.
HOW WOULD OIL CONTINUE TO FLOW INTO THE GLOBAL ECONOMY?
Universal application of the insurance ban, imposed by the EU and the UK in earlier rounds of sanctions, could take so much Russian oil off the market that oil prices would spike, Western economies would suffer and Russia would have increased profits from any oil it can ship in defiance of the embargo .
Russia, the world’s second-largest oil producer, has already diverted much of its supply to India, China and other Asian countries at cut prices after being shunned by Western buyers even before the EU ban.
One purpose of the restrictions is to provide a legal framework “to allow Russian oil to continue to flow while reducing the windfall for Russia,” said Claudio Galimberti, senior vice president of analysis at Rystad Energy.
“For global crude oil markets, it is important that Russian oil continues to find markets for sale, after the EU ban comes into force,” he added. “In the absence of that, global oil prices would skyrocket.”
WHAT EFFECT WOULD DIFFERENT CAP LEVELS HAVE?
A cap between $65 and $70 per barrel could allow Russia to continue selling oil and keep its earnings at current levels. Russian oil is trading at around $63 per barrel, a significant discount to international benchmark Brent.
A lower ceiling — at about $50 a barrel — would make it harder for Russia to balance its state budget, and Moscow is believed to need about $60 to $70 a barrel, the so-called “fiscal break-even.”
However, that $50 limit would still be above the price of Russian production of between $30 and $40 a barrel, giving Moscow an incentive to keep selling oil simply to avoid shutting in hard-to-restart wells.
WHAT IF RUSSIA AND OTHER COUNTRIES DO NOT PROVIDE MALT?
Russia has said it will not respect the limit and will stop shipments to countries that do. A lower limit of around $50 could more likely trigger such a response, or Russia could stop the last remaining supply of natural gas to Europe.
China and India may not agree to the cap, while China could set up its own insurance companies to replace those banned by the US, UK and Europe.
Galimberti says China and India are already enjoying cheap oil and may not want to alienate Russia.
“China and India are getting Russian oil at a huge discount to Brent, so they don’t necessarily need a price cap to continue to enjoy the discount,” he said. “By respecting the limits set by the G-7, they risk alienating Russia. As a result, we believe compliance with the price ceiling will not be high.”
Russia could also turn to schemes such as transferring oil from ship to ship to disguise its origin and mixing its oil with other types to circumvent the ban.
It remains to be seen what effect the cap would have.
What about the EU embargo?
The biggest impact of the EU embargo may come not on December 5, as Europe finds new suppliers and Russian barrels are diverted, but on February 5, when an additional ban on refined products made from petroleum — such as diesel fuel — comes into effect in Europe.
Europe will have to turn to alternative supplies from the US, the Middle East and India. “There will be a shortage, and that will result in very high prices,” Galimberti said.
Europe still has many cars that run on diesel. Fuel is also used for trucking to get a wide range of goods to consumers and to run farm machinery — so those higher costs will spread across the economy.