Capping Russian oil prices at $60 a barrel does little to immediately reduce Kremlin revenues as Western policymakers, especially those in the United States, focus more on keeping crude flowing. Russia and on preventing a fall in world oil supply and another price. spike, analysts say.
The price cap, led by the United States through the G7, officially serves a dual purpose – to reduce the oil revenue Putin has available to continue the war in Ukraine, and to keep the oil flowing – at a lower price – to avoid a soaring oil prices as central banks continue to fight inflation with aggressive interest rate hikes.
The idea of a Russian crude price cap – first floated in March – was to punish Putin for the invasion of Ukraine by reducing oil revenues available to Russia, with energy exports being the largest contributor to Russian state revenue.
The United States tried to defuse the price spike of the ban on EU shipping services
However, as oil and energy prices soared in the spring and began to fuel inflation levels not seen in four decades, policymakers began to believe that keeping oil prices low should be the priority, sources knowing how the ideas on the evolved price cap mechanism say Reuters.
The US Treasury’s “real motivation after March was mainly to preserve Russian flows in the face of EU sanctions, which they don’t think is a good idea,” a source briefed on discussions with the Treasury told Reuters. Biden administration.
“They thought that if there was an oil price spike, not only would it hurt us economically and politically, but it would damage Western support for Ukraine,” the source added.
Ben Cahill, senior fellow for the energy security and climate change program at the Center for Strategic and International Studies (CSIS), said in a analysis a week before the price cap was agreed, “US Treasury officials appear to view the price cap as a defensive measure to ward off the worst potential impacts of the EU service ban.”
“Based on public feedback, Treasury officials are deeply concerned about a possible price spike. Therefore, a high price cap that does little to reduce Russian oil revenues may be acceptable,” said Cahill said.
Policymakers were also likely careful not to set the cap too low, which would have created huge arbitrage opportunities and possibly tempted more players in the physical oil market to engage in illicit deals. off-cap involving “dark fleets”, he noted. .
on December 5, the EU banned shipping services from shipping Russian crude oil to third countries and imposed an embargo on maritime imports of Russian oil into the EU, with some temporary exemptions.
But officials and policy makers would have been more concerned about the ban on EU companies and EU people getting involved in shipping, insurance and ships carrying Russian crude, without no action to mitigate the impact on global oil supply and what would have been a price spike. .
Hence the Russian oil price cap, which allows access to all services provided by EU, UK or G7 companies or individuals if the crude is sold at a certain price or in below.
Russian oil revenues have not yet fallen
Set at $60 a barrel just days before the EU embargo takes effect on Monday, the price cap is unlikely to immediately reduce Russia’s oil revenues – its crude would be sold at such high prices. discounts against Brent that it is even below $60 a barrel, analysts say.
China and India, Russia’s main oil customers today, have not joined the so-called Price Cap Coalition and keep buying Russian crude at very favorable prices. The existence of a price cap even gives buyers more bargaining power to negotiate low prices for Russian deliveries, traders and analysts say.
According to Reuters estimates, at a ceiling price of $60 a barrel, Russia would earn as much oil revenue as it did in the summer of 2021 before Russian troops began building near the border with Ukraine.
In September 2022, Russia’s oil revenues fell $3.2 billion from the previous month at $15.3 billion, due to falling crude oil prices and lower oil exports, the International Energy Agency (IEA) said in its October oil market report. This is the lowest monthly oil export revenue for Moscow this year, but is more or less the level it gained in June or July 2021.
In the future, revenues could fall further, especially if the “shadow fleet” tankers that Russia is accumulating are not able to transport all current volumes to buyers due to logistics and insurance issues.
Russia could also stop trading oil with any member country of the Price Cap Coalition, as Moscow says the price cap artificially limits prices in a non-market mechanism that it will not accept. .
By the end of this year, Russia expects legislation to be prepared that will ban Russian companies from selling oil to countries that are part of the Price Cap Coalition, Russian Deputy Prime Minister Alexander said. Novak. said earlier this week.
Russia is also preparing a response to the EU embargo and price cap, Kremlin spokesman Dmitry Peskov said. said In Monday.
“One thing is obvious – we will not recognize any price caps,” Peskov added.
By Tsvetana Paraskova for Oilprice.com
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