free webpage hit counter

The West wants a price cap on Russian oil. Can it work?

Reducing Russian energy revenues has been the hardest nut for Western governments to date.

After President Vladimir Putin launched a large-scale invasion of Ukraine on February 24, the United States and the European Union imposed sanctions on Russian energy imports in an attempt to weaken the Kremlin’s ability to fund the war.

While the volume of Russian oil and gas production has fallen in the wake of those sanctions, it has been offset by rising fuel prices – largely due to fears of further supply disruptions by Russia in an already tight market.

Russian oil is selling at a steep $ 30 discount to global market prices of between $ 100 and $ 120 due to restrictions, but the Putin government still earns more per barrel than in the months preceding the invasion.

US Treasury Secretary Janet Yellen said on June 20 that Western countries are now working on a new strategy to curtail revenues by targeting the price that Russia receives for its oil, and at the same time avoiding a supply crisis.

“Reducing Russian oil prices and lowering Putin’s revenues will allow for greater oil supplies to reach the global market,” he said.

Oil has one-third of the Russian federal budget revenue, and a sharp drop in its prices – either by market forces or price limits – could seriously undermine the government’s ability to finance its war in Ukraine.

Words "The killers have no money, stop the oil and gas business" Activists plan to visit the Russian embassy in Frankfurt, Germany on April 4.

Activists protested to the Russian embassy in Frankfurt, Germany, on April 4, “The killers have no money. Stop the oil and gas business.”

US President Joe Biden can discuss the issue with his counterparts at a summit of seven major industrial nations in Germany on June 26-28.

However, some analysts have thrown cold water on prospects of imposing a price cap, saying it is difficult to implement and monitor.

“I think they’re grasping straws right now,” said Ed Chow, an energy analyst at the Center for Strategic and International Studies in Washington.

It’s “good” on paper, “but in practice [it] Doesn’t work, ”Chow said.

Yellen has suggested that one way the West may limit its prohibition is to ban insurance for ships delivering Russian oil above the specified price per barrel.

Europe and Asia

Earlier this month, the European Union, the largest consumer of Russian energy, formally approved a plan to gradually eliminate Russian oil maritime imports by December and February 2023, forcing Moscow to find other markets.

China and India are stealing most of the Russian oil left by the EU.

The EU and Britain have agreed to block their companies from insuring Russian oil-shipping tankers, which could potentially limit the supply to Asia, thereby exacerbating the global oil supply crisis and prices. According to Ristad Energy, an Oslo-based research firm, the International Group of Protection and Indemnity Clubs in London make up about 95 percent of the global oil shipping fleet.

The new policy under consideration by the G7 will create an engraving to allow the shipment of Russian oil to continue if it is below a certain price.

But the price limit on Russian oil does not mean a discount for its buyers. Why not Because Westerners are looking for ways to not only steal Moscow’s money but to use that money to work for Ukraine.

Protesters are holding signs when they gather at LUKoil headquarters in Brussels on May 13 to call for a boycott.  LUKoil, Russia's second-largest oil company, produces 2 percent of the world's crude.

Protesters are holding signs when they gather at LUKoil headquarters in Brussels on May 13 to call for a boycott. LUKoil, Russia’s second-largest oil company, produces 2 percent of the world’s crude.

Amos Hochstein, senior adviser to global energy security at the US State Department, said in a Senate hearing earlier this month that the Biden administration and European allies were looking at “various options” to rebuild Ukraine with Russian energy revenues.

He said the administration wants to ensure that “no one benefits” from Western sanctions imposed on Russian energy, citing the $ 30-a-barrel discount that India and China are currently receiving.

However, “accepting lower levels of Russian insurance” may help China divert the price limit to Russia and possibly any revenues, Ristad said in a June 23 note.

‘No return to profit’

Craig Kennedy at Harvard University’s Davis Center for Russian and Eurasian Studies earlier this year Proposed An alternative policy to reduce the Kremlin’s energy revenues while allocating funds for the reconstruction of Ukraine.

Kennedy suggested that Western countries, except for the purchase of all Russian oil imports through a specialized firm, would receive market prices from buyers but pass production costs to the Russian company or set aside about $ 20- $ 25 a barrel. The remaining funds as funds for the reconstruction of Ukraine.

Prior to the invasion of Ukraine in February, Russia exported 4.5 million barrels of oil and oil products - or about half of it - to Europe.

Prior to the invasion of Ukraine in February, Russia exported 4.5 million barrels of oil and oil products – or about half of it – to Europe.

Kennedy argues that the Kremlin is in a weak bargain compared to Brussels because Russia’s energy infrastructure – including rails, pipelines and ports – is increasingly geared toward exporting oil to Europe.

Prior to the invasion of Ukraine in February, Russia exported 4.5 million barrels of oil and oil products – or about half of it – to Europe.

Kennedy said the Kremlin would find it difficult to sell more oil to China and India because of those countries’ commitment to energy diversification.

Russia would account for more than 40 percent of oil imports to China and India in such a case, he said.

Thus, Russia faces a dilemma: sell to Europe under a price-limit regime or cut production, hoping that the price rise will break Brussels’ resolve.

However, Kennedy and Chou said that cutting production over the long term would cause irreparable damage to the oil fields.

“Most Russian oil wells have very low flow rates and poor economies,” Kennedy said. “Long-term, large-scale shutdowns mean that these tens of thousands of wells will be shut down effortlessly, most of which will never return to profit. This can compromise complex stress management programs. [that are] Critical to the profitability of the sector. ”

However, Ristad said Putin “has already shown his willingness” to block fuel supplies by cutting natural gas exports to several European countries this year.

Is the tariff better?

Brian O’Toole, a former senior adviser to the US Treasury Department, said the price-cap policy, usually without a clear implementation and enforcement, could throw markets off the curve and lead to further price increases.

Interference in markets “can gum things up in ways people don’t expect, and it can have negative collateral effects as a result,” said O’Toole, who is now an analyst at the Washington-based Atlantic Council.

Chow suggested the West impose tariffs, with those proceeds earmarked to rebuild Ukraine, saying it was an easy concept to implement.

For example, a $ 50 tariff on Russian oil imports could lower the Kremlin’s price to $ 50- $ 70 a barrel compared to the current market price range of $ 100- $ 120.

“We know how to impose and enforce tariffs because we do it with thousands of goods,” he said.

Leave a Reply

Your email address will not be published.

Previous post How To Build A Chicken Coop In The Backyard-No Experience Required | Architectural Digest
Next post How to get the best ending