In an effort to limit the fossil fuel earnings that support Moscow’s budget, its military, and the war in Ukraine, Western governments have been aiming to set a price cap on Russia’s oil exports.
The cap is expected to go into effect on Monday, the same day that the European Union (EU) will start a boycott of most Russian oil, including its sea-transported crude.
On Friday, despite the fact that the EU was getting closer to a $60-per-barrel threshold, negotiations were still going on.
This is what to realize about the cost cap, the EU ban, and how might affect shoppers and the worldwide economy:
How would the price cap work and what is it?
Together with the other members of the Group of Seven, US Treasury Secretary Janet Yellen has proposed the cap as a means of limiting Russia’s earnings while maintaining the flow of Russian oil into the global economy.
The goal: Harm Moscow’s finances while avoiding a sharp rise in the price of oil in the event that Russia’s oil is abruptly removed from the global market.
Oil shipping companies and insurance companies can only deal with Russian crude if the price of the oil is at or below the cap. The majority of insurance companies are based in the EU or the UK, so they may be required to participate in the cap.
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How would the global economy continue to receive oil?
In earlier rounds of sanctions, the EU and UK imposed an insurance ban that could be enforced universally. This ban could remove so much Russian crude from the market that oil prices would rise, Western economies would suffer, and Russia would earn more money from any oil it ships in defiance of the embargo.
After Western customers rejected it prior to the EU ban, Russia, the second-largest oil producer in the world, has already rerouted much of its supply to India, China, and other Asian nations at reduced prices.
What impact could different cap levels have?
Choice 1:
According to Simone Tagliapietra, an energy policy specialist at the Bruegel think tank in Brussels, a $60 cap would have little effect on Russia’s finances. He stated that because it would be close to locations where Russian oil is already sold, that “will almost go unnoticed.”
The Russian Urals blend is sold at a significant discount to Brent, the international benchmark, and this week, for the first time in months, it fell below $60 due to concerns about decreased demand from China as a result of Covid-19 outbreaks.
Tagliapietra stated, “Up front, the cap is not a satisfying number.” However, the cap would prevent the Kremlin from profiting in the event that oil prices suddenly rise and the cap applies.
He stated, “If we want to increase the pressure on Russian President Vladimir Putin, the cap might be lowered over time.”The issue is: We have been waiting for a measure to reduce Putin’s oil profits for many months.
Choice 2:
$50 cap Russia’s earnings would be reduced, and Russia would be unable to balance its state budget due to the $50 cap. Moscow estimates that it would need $60 to $70 per barrel to achieve its so-called “fiscal break-even”
However, a $50 cap would still be higher than Russia’s cost of production, which ranges from $30 to $40 per barrel. As a result, Moscow would be compelled to continue selling oil in order to avoid having to cap wells that can be difficult to restart.
Choice 3:
Volodymyr Zelenskyy, president of Ukraine, has praised Poland’s campaign for a $30 cap. A $30 cap, according to Robin Brooks, chief economist at the Institute for International Finance in Washington, would “give Russia the financial crisis it deserves,” according to a tweet from last week.
Disputes regarding the location of the cap highlight disagreements regarding the objective to pursue:Maria Shagina, a sanctions expert at the International Institute for Strategic Studies in Berlin, stated that the United States would support taming inflation rather than hurting Russia’s finances.
She stated that there is not “much time to parse out this disagreement for much longer” with the Monday deadline approaching, adding that “$60 is better than not agreeing at all.”They can, of course, adjust it later to reflect market conditions and tighten it.
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What if Russia and other nations refuse to cooperate?
Russia has stated that it will not adhere to a cap and will stop shipping to nations that do. If the selling price of Russia’s oil is higher than the cap, Russia could ignore it; however, if the cap is lower, Moscow could retaliate by cutting off shipments in the hope of making a profit from a sharp increase in the price of oil around the world.
Buyers in China and India may not agree to the cap, and Russia or China may attempt to establish their own insurance companies to replace those that are prohibited by the United States, the United Kingdom, and Europe.
Similar to Venezuela and Iran, Russia could use tankers belonging to a “dark fleet” to illicitly sell oil. Oil could be disguised by being transferred from one ship to another and mixed with oil of the same quality.
Shagina stated that Russia would be unable to circumvent the restrictions by selling oil because of the cap, even in those circumstances.
Up to four times more tanker capacity is required to transport oil to Asia due to the greater distances involved, and not everyone will accept Russian insurance.
She stated, “You need to tap into this dark fleet, and it is not limitless. “Iran and Venezuela are making good use of it, but you might run into competition with the same goals. Sanctions mechanisms always play a game of cat and mouse.
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What does the EU embargo entail?
At least initially, Russian producers are likely to lose some of their oil to the global market as a result of their inability to reroute all of it from Europe, which was once their largest customer.
Commerzbank analysts anticipate that the price of international benchmark Brent will return to $95 per barrel in the coming weeks and that the EU embargo and cap together could result in “a noticeable tightening on the oil market in early 2023.”Brent was at $86.89 on Friday.
The greatest effect of the EU ban may not come Monday but rather on February 5, when Europe’s extra restriction on processing plant items produced using oil —, for example, diesel fuel — happens.
There are still a lot of diesel-powered cars in Europe. Additionally, truck transportation of a wide range of goods and the operation of agricultural machinery require fuel, so the increased costs will be distributed throughout the economy.
Source: AP
