The world’s seven largest economies (G7) have floated the idea of a cap on Russian oil to put further pressure on the Kremlin’s ability to finance its invasion of Ukraine and try to protect consumers amid soaring energy prices , as reported by CNBC.
However, the G7’s bid to cap Russian oil is not without its challenges, with energy analysts particularly wary of the proposal’s integrity.
For its part, the Kremlin has warned that any attempt to cap Russian oil would do more harm than good.
How the idea came about
The US appears to be the biggest supporter of a cap on Russian oil.
In May, US Treasury Secretary Janet Yellen explained the idea to her European counterparts, saying it would act as a tariff or cap on Russian oil and help Europe in the interim until a full ban is imposed.
The EU agreed in late May to impose a gradual embargo on Russian oil until the end of 2022, after several weeks of tough negotiations between the 27 member states.
The bloc received about 25% of Russia’s oil imports and was one of the most important buyers for the Kremlin. Cutting off these oil purchases is an attempt to hurt Russia’s economy after its invasion of Ukraine, but it is difficult to end these purchases overnight, given that some EU countries are heavily dependent on Russian energy.
US President Joe Biden presented the idea of imposing a cap on Russian oil to the rest of the G7 leaders over the weekend of June 25 and 26, and his counterparts agreed to consider how it would be implemented. It is noted that the G7 consists of the USA, Canada, France, Germany, Italy, the United Kingdom 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 Commission spokesman told 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 inequalities at national and international levels.”
“In this context, as mandated by European leaders, the Commission will continue work on ways to stem the rise in energy prices, including assessing the feasibility of introducing temporary import price caps where necessary,” he said. the same spokesman, adding that the discussions are being treated as something “urgent”.
How could the idea work?
Energy analysts are questioning how exactly the G7 can impose a cap on Russian oil, warning that the plan could backfire if key consumers are not on board, and that time may be running out to make it workable.
“I’m one of those scratching their heads,” Neil Atkinson, an independent oil analyst, told CNBC.
“Something like this could only work if all the key producers and, importantly, all the key consumers work together and then find some way to enforce whatever plan comes up,” he noted, adding: “And the reality is that the largest consumers of Russian oil, or among the largest consumers of Russian oil, are China and India.”
China and India have “benefited enormously” from discounted Russian crude, Atkinson said. Russian oil is selling at a steep discount of $30 or more to international contracts such as Brent crude at $110 a barrel – and China and India are buying it.
Atkinson also highlighted the lack of unity over the Russian invasion of Ukraine, given that China and India have not explicitly condemned the Kremlin.
“In any case, the Russians are not going to just stand idly by. They can play games with oil supplies and of course natural gas, they can complicate the situation for the G-7, so I think this plan is really deadlocked.” , Atkinson said.
“To me, frankly, the mechanism is not workable,” said Amrita Sen, co-founder and director of research at Energy Aspects.
“They haven’t thought it through, they haven’t talked to India and China. Do we really think they’re going to agree to something like this? And do we really think Russia is going to accept this and not retaliate? I think that sounds like a very , very good idea in theory, but it’s just not going to work in practice.”
Sen said the idea that countries around the world have the same attitude as Western officials, especially when it comes to energy security, is “the biggest misunderstanding right now.”
For Claudio Galimberti, senior vice president of energy research firm Rystad, the most direct mechanism for capping Russian oil is through insurance.
“The International Group of Protection & Indemnity Clubs in London covers about 95% of the world’s oil tanker fleet. Western countries could try to impose a cap by letting buyers keep this insurance as long as they agree not to pay more than one certain price ceiling for Russian oil on board,” Galimberti said.
“However, there are many obstacles that could derail such a plan,” he added.
Among the most obvious examples, Galimberti said, is the fact that Russia could simply decide not to sell at the prices set by the cap, especially if the reference price is too low and close to the cost of production.
Russian President Vladimir Putin has already indicated his willingness to withhold 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 provide support to Russia, accepting inferior Russian assurance and thereby facilitate a loophole for the cap.”
“Nevertheless, a 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 respond?
Russia has warned that any attempt to cap the price of Russian oil could cause chaos in the energy market and push commodity prices even higher.
Russian Deputy Prime Minister Alexander Novak described the move by Western leaders to consider imposing a cap as “another attempt to interfere with market mechanisms that can only lead to market imbalances, which will lead to higher prices.” , according to Reuters.
Novak said he was confident that Russia would restore oil production to pre-sanctions levels in the coming months, mainly because a significant amount of Russian crude has been rerouted to Asian markets.
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