The seven leading Western powers have agreed to impose a “price cap” on Russian oil. What does this mean?
The West has already tried to impose an embargo on Russian energy carriers. It turned out to be quite limited, so now they have made attempts to reduce Moscow’s income from resource exports by introducing a price ceiling.
The essence of the idea
The United States is afraid of a sharp jump in world prices for raw materials and oil products in the coming winter and offers everyone to agree and offer Russia not a market price for oil, but a fixed one – slightly higher than the cost price.
As the authors thought, the idea of a price ceiling gives Russia the opportunity to avoid a total embargo, maintain sales markets and the oil industry, but limit export earnings and the Kremlin’s ability to finance a war against Ukraine.
“Without a price ceiling, we face the threat of a global spike in energy prices if (because of the embargo) most of Russia’s oil production stops,” said the originator of the idea, the Treasury Secretary of the US Jeannette Yellen.
Russia already sells its oil at a discount, mainly to China and India. If before the war the mixed Russian Urals was traded at a discount of several dollars to the reference grade Brent, then with the introduction of Western sanctions this discount increased to 30-40 dollars.
The closer the European embargo on Russian oil, which will take effect on December 5 and will lead to a sharp artificial reduction in world oil supply and a jump in prices, the smaller this discount will be. However, Ural is about $20 cheaper than a barrel of Brent, which was $95 on Friday.
global overhaul
Even if India and China do not join the price ceiling, the path of Russian oil to the market will be seriously complicated with the introduction of sanctions in Europe in December, because not only the European Union, Switzerland and the United Kingdom prohibit their factories and merchants. from its purchase, but also imposes a ban on insurance, financing and chartering of ships.
Since tanker traffic is dominated by Greece, insurance is concentrated in London, and trade is concentrated in Switzerland, Russia needs to look not only for new buyers, but also to develop alternative supply chains in global market from the beginning.
Such a massive restructuring of the global oil market is not possible overnight. It is fraught with a sharp decline in oil production in Russia and an increase in the price of oil products and raw materials in the world. A price ceiling can only prevent the same. Russia was offered to pay for it.
Russia responded
Russia says it will not sell oil at low prices. Deputy Prime Minister Alexander Novak says that Russia is ready to trade only at the market price.
“If they put price restrictions, then we will not supply oil and oil products to such companies or countries that will impose restrictions, because we will not work in market conditions,” he said.
Without Russian oil
Russia is one of the world’s top three oil exporters along with Saudi Arabia and the United States.
Before the invasion of Ukraine, it supplied world markets with about 8 million barrels of oil and petroleum products per day, but due to sanctions and consumer restraint, the global market lost about 2 million barrels of Russian oil exports, according to S&P Global.
As a result, oil prices rose to over $100 a barrel and would have gone higher, but the West stepped in with an intervention from strategic reserves, the largest in half a century since the Arab oil embargo of the early 1970s.
Similar idea for gas
The European Union should limit the price of pipeline gas from Russia to mitigate market manipulation by Vladimir Putin’s regime, European Commission President Ursula von der Leyen said.
The price of gas for the European market for deliveries in October changed around 213 euros per MWh. A year ago it was around 29 euros, and two years ago it was around 15 euros/MWh. It started rising more noticeably last fall, reaching around 345 euros/MWh shortly after Russia’s invasion of Ukraine.
The possibility of introducing a maximum price for Russian gas will be discussed in a week by the energy ministers of the EU countries, whose extraordinary meeting was convened by the Czech presidency of the EU Council.
The President of the European Commission was also called for energy conservation, he must present a specific plan in mid-September.
Source: korrespondent
I am David Wyatt, a professional writer and journalist for Buna Times. I specialize in the world section of news coverage, where I bring to light stories and issues that affect us globally. As a graduate of Journalism, I have always had the passion to spread knowledge through writing.