The Group of Seven (G7) countries is planning to cap the price of Russian oil in an attempt to restrict Moscow’s ability to fund its invasion of Ukraine, plan analysts say could succeed in the long term but might push up oil prices in the coming months.
Officials in G7 countries, including Janet Yellen U.S. Treasury Secretary, said the unprecedented measure, set to kick off Dec. 5, will reduce the price Russia receives for oil without cutting petroleum exports to world consumers.
Russian President Vladimir Putin could resist, triggering stress in oil markets even as the plan succeeds. Below are questions about the price cap and the challenges it faces.
WHO’S IN THE PRICE CAP COALITION?
The G7 wealthy nations — the United States, Britain, Germany, France, Japan, Canada, and Italy – and the EU are thrashing out details of the plan. The G7 intends to enlist other countries, including China and India, which have been taking advantage of largely-discounted oil from Russia since its Feb. 24 invasion of Ukraine.
Moscow has been able to maintain its revenues through those additional crude sales to China and India.
But even if China and India don’t become members, a cap could help push down prices for Asia and other consumers. Ben Harris U.S. Treasury Assistant Secretary for Economic Policy said on Sept. 9 that if China hammers out a separate 30%-40% discount on Russian oil as a result of the price cap “we consider that a win.”
The agreement on the price cap level will be reached with the help of a “rotating lead coordinator,” the U.S. Treasury Department said in guidance sent out on Friday indicating that countries in the coalition will have a temporary leadership role as the plan moves forward.
WHAT’S THE LEVEL OF THE PRICE CAP?
It might be weeks before the price of Russian crude oil and two oil products will be set, according to Harris.
Washington-based ClearView Energy Partners has said officials have been considering a $40-$60 per barrel range for crude. The upper end of that range is similar to historical prices for Russian crude, while the lower end is nearer to Russia’s marginal production cost, analysts say.
Coalition members with long military and economic relations with Russia could press for a higher cap, while a cap too low could knock market share off from Saudi Arabia and other oil producers. “The level will be determined by both quantitative and qualitative reasons,” said Bob McNally, president of Rapidan Energy Group.
Russian crude is priced at a discount to the international Brent benchmark and the G7 intends to keep that spread wide, to limit Russian oil revenue.
Nevertheless, attaining a widespread could indicate sky-high prices for Western consumers as Russia is the world’s second-biggest crude exporter, behind Saudi Arabia.
WHAT DOES THE G7 EXPECT FROM MARITIME SERVICES?
The plan decided by the G7 requires participating countries to deny Western-dominated services including finance, insurance, navigation, and brokering to oil cargoes price above the cap. To acquire those services, petroleum consumers would make “attestations” to providers saying they purchased Russian petroleum at or below the cap.
Maritime services providers will not be held accountable for incorrect pricing information offered by sellers and buyers of Russian petroleum, the U.S. Treasury said. G7 officials think the plan will succeed because the London-based International Group of Protection & Indemnity Clubs offers marine liability cover for almost 95% of the global oil shipping fleet.
Traders suggest parallel fleets that can direct Russian oil using Russian and other non-Western insurance that could be used to evade enforcement efforts. It remains unknown how many ports across the world will allow Russian-insured ships.
Craig Kennedy, an associate at Harvard University’s Davis Center for Eurasian and Russian Studies, said the G7 has long-term leverage because Moscow is limited by a small tanker fleet versus the large scale of exports it requires to move. If Russia doesn’t intend to sell at the cap, it may have to cut production, which could introduce long-term costs to its oilfields.Buy Bitcoin Now
HOW COULD RUSSIA STRIKE BACK?
Putin has said Russia will stop exports to countries that put in place the cap, and fears about the threat could trigger petroleum markets to boom before December.
Soaring prices could also be risky for U.S. President Joe Biden ahead of midterm elections in November when his fellow Democrats want to maintain control of Congress.
Several analysts worry Moscow could retaliate by taking actions beyond Russia’s borders before the cap is enforced.
“My biggest concern is I think Putin is going to make it very, very painful on the way to Dec. 5,” Helima Croft, head of global commodity strategy at RBC Capital Markets, told a Brookings Institution event on Sept. 9. “They also have assets in other producing countries, whether it be Libya, whether it be Iraq, and they have an ability to cause some problems in other producer states.”
HOW WILL THE CAP TAKE EFFECT?
The U.S. Treasury warned service firms to be on the lookout for red flags indicating possible evasion or fraud by Russian oil buyers. Those could include refusal to provide requested price information, excessively high service costs, or evidence of deceptive shipping practices.
Deputy .S. Treasury Secretary Wally Adeyemo said on Friday (September 9) that those who forge documentation or otherwise conceal the true origin or price of Russian oil would bear the consequences under the domestic law of jurisdictions enforcing the price cap.