Ukraine’s allies want to put a price cap on Russian oil. But there’s a problem: they can’t agree on a number that would actually increase pressure on the Kremlin.
Major Western economies agreed earlier this year to cap the price of Russia’s most valuable exports and have promised to clarify the details by early December. The move is intended to reduce inflows to President Vladimir Putin’s war chest without adding stress to the global economy by further reducing the supply of energy.
But as the deadline approaches, countries are still haggling over where to set the cap.
Media reports this week from a meeting of European diplomats indicated that Russian oil could be capped at between $65 and $70 a barrel. Yet this range is controversial, as it is close to the current market price of Russian crude. This would mean limited supply disruption, but also limited pain for Russia.
“At this price point, it’s about reducing inflation instead of reducing Russian revenue,” said Helima Croft, head of commodity strategy at RBC Capital Markets.
Earlier this month, a barrel of Russian Ural crude cost little more $70, about $24 below Brent, the international benchmark.
Lowering the price, meanwhile, could exacerbate the global energy crisis, particularly if Russia reacts. If it were to cut production more than expected, it would drive up fuel prices just as countries like the US, Germany and Japan are eager to keep inflation in check.
Putin said on Thursday that Western plans to introduce caps on oil prices would have “serious consequences” for energy markets.
European Commission President Ursula Von der Leyen said on Thursday she was “confident that very soon we will approve a global ceiling for Russian oil with the G7 and other important partners”. US President Joe Biden said oil price talks were “on the line”.
But the policy debate is dragging on, highlighting the complexity of the effort.
The countries want to reach an agreement before December 5, when the European embargo on Russian crude oil traveling by sea takes effect. That’s because the EU sanctions package also includes a ban on providing insurance and other services to ships carrying Russian crude.
This would make it more difficult for Russian customers such as China and India to continue importing millions of barrels a day. Most of the insurers covering the transport of crude oil are based in Europe or in the United Kingdom, which cooperates with Brussels.
The oil price cap aims to change that policy. Shipping services and insurance could be provided to tankers carrying Russian oil, provided it is purchased at or below the price set by Western nations.
“This will help further reduce Russia’s revenues, keeping global energy markets stable through continued supplies,” the European Commission explained. “It will therefore also help tackle inflation and keep energy costs stable at a time when high costs, particularly fuel prices, are a major concern.”
However, actually setting a price proved tricky. Poland and other Eastern European countries want a lower limit, noting that it costs Russia far less than $65-70 to pump each barrel of oil. A cap between these prices would then allow Moscow to continue to reap profits from its crude sales.
Consulting firm Rystad Energy estimates the cost of production for Russia to be between $20 and $50 a barrel, depending on how the numbers are calculated.
Additionally, Russia’s budget includes a forecast that oil will export at an average price of about $70 a barrel in 2023. If it can get that price on the market, it could continue spending mostly as planned.
Ukrainian President Volodymyr Zelensky said on Friday that the limit should be set at $30.
“We hear about it [proposals to set the cap per barrel at] $60 or $70. Such words sound more like a concession [to Russia]”, he said via a video link during a conference in Lithuania.
If the price is too low, however, Russia could go wild and reduce its production. That could shake markets, given that Russia’s exports in 2022 stand at about 9.7 million barrels per day, according to the International Energy Agency. It is higher than in 2021.
The price level is not the only issue at hand. Setting a static range for the price cap, as opposed to setting a variable discount for Russian crude pegged to where Brent is traded, could pose logistical problems, as it would need to be adjusted frequently.
There is also skepticism among oil traders that the measure can be enforced, according to UBS analyst Giovanni Staunovo. He expects transacting parties to simply hunt for loopholes.
“There’s a strong desire to do something,” she said. “But the reality will be different.”
Some analysts think the price cap will ultimately be less important than the European oil embargo. The bloc has bought about 2.4 million barrels a day of Russian crude and Moscow will soon be forced to look for new customers.
To limit the reserve barrels, it is likely to reduce production. That could push oil prices higher no matter what.
“Due to the EU oil embargo and the cap on oil from Russia, oil production is likely to be significantly curtailed,” Commerzbank said in a note to clients. “This should drive up the price of Brent oil in the coming weeks.”
— Clare Sebastian, Allegra Goodwin, Betsy Klein, Radina Gigova, and Uliana Pavlova contributed to the alert.