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What does the new Russian oil price cap mean for consumers?

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A $60 price cap on Russian oil opens a new front by Western nations seeking to deplete the country’s resources to wage war in Ukrainewhile injecting further uncertainty into global energy markets.

The cap, which came into force on Monday after a marathon negotiating session between the ‘Group of Seven’ countries Australia and the European Union, aims to limit the revenue Russia can earn from fossil fuel exports and to weaken Moscow’s ability to finance its army. efforts. In a related move to pressure Russian President Vladimir Putin, the EU and UK on Monday imposed a boycott of Russian oil that is shipped by sea.

Although the price of crude was stable on Monday, these measures complicate an already volatile situation, with fears that the embargo could push up energy prices by reducing the world’s oil supply. Here’s what to know about Russia’s oil price cap, EU embargo, and what these developments could mean for American consumers and the global economy.

Why limit Russian oil?

The objective of the price cap is twofold: to limit the revenue that Russia can earn from the sale of its oil abroad while keeping crude oil on the world market.

Previously, the EU and UK had floated the idea of ​​a ban on insuring Russian oil shipments, but there were fears that removing such a large amount of oil from the markets could cause prices to spike and savings.

“There is an inherent tension between (1) the significant reduction in Russia’s export earnings and (2) the avoidance of physical shortages in the global oil market. EU and G7 policymakers are aware current inflationary pressures and resulting policy complications,” analysts Raymond James wrote in a research note on Monday.

Who does the price cap apply to?

The United States stopped importing Russian crude oil this spring and the EU embargo on Russian crude went into effect on Monday. The cap targets third countries that still import Russian oil and depend on Western shippers or insurers.

“China, India and Turkey stand out as major oil importers that do not have their own sanctions against Russia, and so the price cap is most directly relevant to them,” analysts noted. Raymond James.

Russia, the world’s second-largest oil producer, has already redirected much of its supply to India, China and other Asian countries at cut prices after Western customers shunned it even before the ban on the EU.

How does the price cap work?

Insurance companies and other businesses needed to ship oil would only be able to process Russian crude if the price of oil is at or below the $60 cap. Most insurers are located in the EU or UK and may be required to participate in the cap.

“The operation of the price cap depends on a vital element of global oil trade: the maritime services industry, which includes insurance, trade finance and other key services that support the complex transportation of oil in the world,” the U.S. Treasury said in a fact sheet. The agency noted that “almost all ports and major canals require vessels to be covered by protection and indemnity insurance”, with around 90% of the market controlled by G7-based companies, and therefore subject to on the ceiling.

While Russia can try to circumvent the cap using different shipping and insurance resources, the cap makes it “more expensive, longer and heavier”, said Maria Shagina, sanctions expert at the International Institute. of Strategic Studies in Berlin, to the Associated Press.

“This game of cat and mouse is always inherent in the mechanisms of sanctions,” she said.


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How did Russia react?

Russia has rejected the price cap, with Kremlin spokesman Dmitry Peskov saying Russia needs to analyze the situation before deciding on a specific response, according to the AP.

Mikhail Ulyanov, Permanent Representative of Russia to International Organizations in Vienna, tweeted that the country would stop oil deliveries to countries supporting the cap. He called Western actions “politically motivated anti-market decisions that endanger [the] stability of the oil market.

The EU risks retaliation if Russia halts all crude imports to the continent. While since Monday the EU no longer imports Russian oil by tanker, the continent still imports Russian oil by pipeline.

“For Russia, why send oil to participating countries? That’s the risk Europe takes,” said Patrick DeHaan, energy analyst at GasBuddy, while noting that any effect could take weeks or months to unfold. to be smelled.

DeHaan noted that much will depend on other factors, including cold winter weather, a slowing global economy – reducing demand for oil – or renewed growth in China, boosting demand for Russian crude.

If Russia cuts off oil to Europe, it “could be offset by drawing on strategic stocks under the auspices of the International Energy Agency,” JPMorgan Chase noted. “These stocks are obviously not infinite, but even with last year’s drawdowns, the world’s major economies are ready to respond to an oil shock.”

Meanwhile, the other countries currently importing Russian crude via ships – China, India and Turkey – will likely be able to circumvent the cap, analysts say.

India said last week that it would continue to buy Russian oil without resorting to Western financial or insurance services. Treasury Secretary Janet Yellen has previously said she would be “happy” for India to do so, including if the price of oil breaches the cap.

Media reports that Russia is assembling its own fleet of tankers to dodge Western limits. Oil could also be transferred from ship to ship and mixed with oil of similar quality to disguise its origin.


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What is the effect of different price cap levels?

The $60 cap was a compromise between EU member states who wanted to avoid price spikes in global oil markets and others, including Poland and the Baltic states, who wanted the cap lowered to financially punish Russia.

Currently, Russian oil is selling at just under $60 a barrel, which means the cap won’t have much of an effect on Russia’s finances. It “will go almost unnoticed,” Simone Tagliapietra, an energy policy expert at the Bruegel think tank in Brussels, told the AP.

“Up front, the ceiling is not a satisfactory number,” Tagliapietra said. However, if the price of oil were to skyrocket, the cap could come into effect and potentially affect

The EU has also given itself leeway to adjust the ceiling according to the world price of oil.

“These are politicians trying to do something without doing anything,” DeHaan said, noting that the price of oil has fallen in recent weeks even as the price ceiling approached.

Russia needs to sell oil at around $30 a barrel to cover its production costs, analysts say.

Robin Brooks, chief economist at the Institute for International Finance in Washington, tweeted last week that a $30 cap would “give Russia the financial crisis it deserves.”

What happens next?

The biggest impact of the EU embargo may not come this week but on February 5, when Europe’s additional ban on petroleum-based refinery products, including diesel fuel, comes into effect. in force.

Europe still imports about 1.3 million barrels a day of Russian refined products, half of which is diesel, according to JPMorgan Chase. Europe still has many cars running on diesel, which is also used for trucking to deliver a wide range of goods to consumers and to run agricultural machinery. These higher costs will likely ripple throughout the economy.

Commerzbank analysts say the EU embargo and cap could lead to “a noticeable tightening of the oil market in early 2023” and expect the international benchmark price of Brent to rise to $95 per month. barrel in the coming weeks. OPEC, the oil cartel, indicated at its meeting this weekend that it will not increase supply in response to EU measures.

“The implicit message to the US, EU and G7 is that they will now have to reap what they have sown; if prices rise due to EU sanctions and price caps imposed on the Russia, OPEC+ is not ready to move quickly to resolve the production shortfall,” Eurasia Group’s Raad Alkadiri said in a note.

With Associated Press reporting.



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