The G7 countries want to cap the price of oil sold by Russia. The aim is to reduce Moscow’s revenues and lower the world price of black gold. This strategy is risky and will probably have the opposite effect.
Russia is one of the world’s largest oil exporters. Before the conflict in Ukraine began, the country exported more than 10 million barrels of oil per day, or about 9% of global crude exports. Despite Western sanctions, these figures have remained virtually unchanged.
During the first six months of the war, Moscow has earned 158 billion EUR from the sale of oil and gas, according to the think-tank Centre for Energy and Clean Air Research (CREA). Two-thirds of this revenue comes from the export of crude oil and refined products.
The United States and the European Union want to reduce Moscow’s oil revenues by capping the price of its oil. From 5 December, G7 countries will ban banks from financing the purchase and sale of Russian oil, insurance companies from insuring shipments and ports from unloading oil transported by tanker if it is traded above a ceiling price yet to be determined.
The question of the level of the price cap is tricky. If it is too low, it could trigger Russian retaliation by shutting down large swathes of oil production, which would drive up world crude prices and deepen the global energy crisis. If the price is too high, Russia will continue to make large profits and finance its war effort.
According to CREA, 60% of the tankers carrying Russian oil are owned by European companies and nearly three out of four ships are insured or reinsured in Britain, notably by Lloyd’s of London, or Norway. “The proposal seeks to leverage Western dominance in shipping, banking and marine insurance. It amounts to forcing the world into a cartel of buyers,” the Bruegel Institute points out. The embargo on all services related to oil exports is intended to make shipping almost impossible
The US, UK, Canada, Germany, France, Italy and Japan are betting that Russia will need US dollars so badly that it will agree to sell its oil despite the price cap. But the reality could be very much different.
On 7 September, Russian President Vladimir Putin said at the economic forum in Vladivostok that such a move “would be an absolutely stupid decision”. “We will not supply anything at all if it is contrary to our interests, in this case economic (interests),” he said. “No gas, no oil, no coal, no fuel oil, nothing.”
More recently, at an OPEC+ meeting in Vienna, Russian Deputy Prime Minister Alexander Novak reiterated the warning that his country will not sell oil to countries that adopt such a cap. “We believe that this tool is in breach of all the market mechanisms. It could be very pernicious for the global oil industry… We will be ready to cut production (deliberately)”.
It turns out that other oil producers do not look favourably on the G7 decision to cap Russian oil prices either. According to Bloomberg energy expert Javier Blas, they see the decision as a terrible precedent for consumers trying to dictate oil prices to producers.
This is probably one of the reasons why OPEC+ decided last week to collectively cut oil production by 2 million barrels per day, or about 2% of global oil consumption. Officially, the UAE energy minister said it was a “technical decision, not a political decision”. Saudi Arabia added that the production cut was justified by market conditions amid fears of a global recession.
In fact, this OPEC+ decision could mark the beginning of the US losing control of the global oil market. As a reminder, US President Joe Biden visited Saudi Arabia in June to ask for an increase in oil production, but without real success. “There’s going to be some consequences for what they’ve done with Russia,” Mr. Biden told CNN’s Jake Tapper in an interview broadcast on Tuesday night.
Finally, the success of a Russian oil price cap would require a united front from all global buyers. It is unlikely that China and India, and even Turkey, will agree to submit to these sanctions. Since the start of the war, India and China have made up for most of the decline in Russian shipments to Europe.
Russia would then send more barrels to these countries using mainly Russian, Chinese and Turkish flagged vessels. Russia would continue to offer discounts, but not up to the ceiling set by the G7.
On 5 October, Patrick Pouyanné, CEO of TotalEnergies, told at the Energy Intelligence Forum that a cap on Russian oil prices would benefit Russian President Vladimir Putin.
“I think it’s a bad idea because it’s a way to give the leadership back to Vladimir Putin and I would never do that.”
“What I am sure is that if we do that (cap), then Putin will say that ‘we don’t sell my oil’ – and the price will not be at $95, it will be at $150.” Pouyanné said.