Cheap or not at all?
G7 discuss price cap for Russian oil
6/26/2022, 5:44 p.m
Despite Western sanctions, Russia earns billions from oil exports. At the same time, hundreds of millions of people in the USA and Europe have to accept sharp price increases for petrol and heating oil. After a long debate, the US government claims to have found a way of how the stop the oil price rally. At the G7 summit in Elmau comes the tricky one proposal on the table. Questions and answers at a glance.
The US is promoting an international price cap for Russian oil. The proposal envisages forcing Russia to sell oil to large buyers such as India at a significantly lower price in the future. The hope is that this will ease the markets. In addition, it should also be ensured that Russia no longer benefits from rising oil prices and can thus fill its war chest.
Didn’t the EU just decide on an oil embargo against Russia?
Yes, but this could ultimately result in world prices continuing to rise because of the then increasing demand for non-Russian oil – which would be good for Russian President Vladimir Putin and bad for consumers and the economy in all countries that have to import oil . In the G7 countries it is therefore currently considered better if third countries continue to purchase Russian oil. But this should be kept artificially cheap.
How could Russia be forced to sell its oil cheaper to countries like India?
The idea is to link important services for oil transport to compliance with the price cap. For example, it could be decided that western insurance services for shipments of Russian oil would not be subject to sanctions regimes if the price cap is respected. There could be similar regulations for shipping companies that provide ships for the transport of Russian oil.
Are there no alternatives to western services?
Yes, but the capacities are not sufficient according to the price cap planners. For example, a large part of all ship transport is insured via the insurance marketplace Lloyd’s of London, and German companies play a major role in reinsurance. Many oil transporters belong to shipping companies from EU countries such as Greece, Belgium or Malta.
Why is insurance needed at all?
These insurance services are important because oil tankers are generally not allowed to sail uninsured through the sovereign waters of states. This requirement is intended to ensure that compensation can be paid in the event of an average or an environmental disaster. Countries like Greece have recently prevented European shipping companies from being banned from transporting Russian oil.
Why would they now agree to a ban on “expensive” Russian oil?
The lever is that European shipping companies are generally dependent on access to the US financial market. The USA could therefore simply decide unilaterally on its own that US companies are no longer allowed to do business with shipping companies that do not observe the price cap.
How much revenue could Russia lose?
Most recently, a barrel (159 liters) of Russian Urals oil cost around 100 US dollars. With an estimated production cost of around $20 and a price cap of, say, $60, Russia would then lose half of its profit per barrel. At the same time, those states that no longer want to buy oil from Russia at all can hope that the situation on the markets will ease somewhat.
What effects would the price cap have on prices in Germany and the other G7 countries?
Ideally, oil prices would fall; in the less favorable case, at least they would not rise any further. However, precise forecasts are difficult to make. The mineral oil trade association Fuels und Energie already explained in the discussion about the EU oil embargo that market and price developments depend on many factors, including the dollar exchange rate and the decisions of the major producing countries.
When could there be a decision on the price cap?
According to diplomats, the USA is aiming for an agreement in principle at the G7 summit, which will last until Tuesday. However, EU Council President Charles Michel made it clear on Sunday that “fine tuning” was still needed from the EU’s point of view. For example, it is unclear how the upper price limit will work if Western insurers no longer want to insure Russian oil transports.