What is the impact of Russia’s oil price cap and ban?

Frankfurt – Western governments aim to cap the price of Russian oil exports by the year 2000. seek to limit fossil fuel earnings Moscow budget, army, Invasion of Ukraine.

The cap is to come into force on the same Monday as the European Union imposes boycott most Russian oil — Crude oil transported by sea.of The EU was nearing the threshold of $60 a barrelbut negotiations were still underway on Friday.

The two measures could have an uncertain impact on oil prices as fears of lost supply due to boycotts compete with fears of lower demand from the United States. global economic slowdown.

Here’s what you need to know about price caps, EU embargoes, and what they mean for consumers and the global economy.

What is a price cap and how does it work?

US Treasury Secretary Janet Yellen proposed a cap along with seven other allies As a way to limit Russian revenues while keeping Russian oil flowing into the global economy. The aim is to hurt Moscow’s finances while avoiding oil price spikes if Russian oil is suddenly deprived of world markets.

Insurance companies and other companies required to transport oil If the price of crude oil is below the cap, treat Russian crude oilMost insurers are located in the EU or UK and may be required to participate in a cap.

How will oil keep flowing into the global economy?

Universal enforcement of the insurance bans imposed by the EU and UK in the previous series of sanctions could take a very long time. Russian crude oil from the market Oil prices will soar, Western economies will suffer, and Russia will profit from the oil it can ship ignoring the embargo.

Russia, the world’s second-largest oil producer, is already Reroute much of the supply to India, China and other Asian countries Even before the EU ban, at discounted prices after Western customers avoided it.

What is the impact of different cap levels?

Simone Tagliapietra, an energy policy expert at Brussels think tank Bruegel, said the $60 cap wouldn’t have much of an impact on Russia’s finances. “It will go largely unnoticed,” he said, because it is so close to where Russian oil is already being sold.

Russia’s Ural blend is selling at deep discounts to international benchmark Brent, dropping to 60 this week for the first time in months on concerns over reduced demand from China due to the COVID-19 outbreak. fell below the dollar.

“Up front, the ceiling is not a satisfactory number,” said Tagliapietra, but if oil prices suddenly rise and the ceiling is engaged, the Kremlin will not be able to make a profit.

“If they want to put more pressure on Russian President Vladimir Putin, the cap may be lowered gradually,” he said. “The problem is that we have already been waiting for months for the measures to weaken.” Putin’s Oil Profits.

Lowering the cap to $50 would reduce Russia’s revenue, Russia balances state budgetMoscow is believed to need about $60 to $70 per barrel to do so, the so-called “fiscal break-even point”.

But even setting the cap at $50 would exceed Russian production costs of $30 to $40 per barrel, so to avoid having to cap hard-to-restart wells. Only then will Moscow have an incentive to continue selling oil.

Ukrainian President Volodymyr Zelensky praised Poland for pushing the $30 cap. Robin Brooks, chief economist at the Institute for International Finance in Washington, tweeted last week that the $30 cap “will give Russia the financial crisis it deserves.”

Maria Shagina, a sanctions expert at the International Institute for Strategic Studies, said the dispute over where to set the cap highlights disagreements over which goal to pursue. Berlin.

With Monday’s deadline looming, “I don’t have much time to settle this disagreement any further,” she said, adding, “I’d rather have $60 than disagree at all. You can modify it later to reflect the situation…and tighten it up.”

What if Russia or other countries disagree?

Russia has said it will stop deliveries to countries that do not comply with the cap. Russia may ignore the cap if it is above the selling price of crude oil, but if it is below the limit, Russia will keep whatever it can sell around the sanctions from a sharp rise in global oil prices. They may retaliate by halting shipments in hopes of making a profit.

Chinese and Indian buyers While Russia and China may try to set up their own insurance providers to replace them, cap may not work. Banned by US, UK, and EuropeRussia could also sell oil off the books, like Venezuela and Iran, using ‘dark fleet’ tankers of obscure ownership.

Even under such circumstances, the cap would make it “more expensive, time-consuming and cumbersome” for Russia to circumvent the restrictions and sell oil, Shagina said.

Longer distances to transport oil to Asia means up to four times more tanker capacity is needed, and not everyone has Russian insurance.

“We need to tap into this fleet of darkness, but it’s not infinite,” she said. “Iran and Venezuela have used it fairly effectively, but they may face competition from the same targets.

What about the EU embargo?

Russia may struggle to find buyers for all the million barrels a day it ships to its former largest customer, Europe, but as Europe finds new suppliers in global markets, those Most can be rerouted.

The biggest impact of the EU embargo may not come on Monday, when Europe finds new suppliers and Russian barrels are rerouted, but it may come on Feb. 5, when Europe bans more refineries. I can’t Products made from petroleum — such as diesel fuel – come into effect.

There are still many cars in Europe that run on diesel. Fuel is also used for trucking a wide range of commodities to consumers and for running agricultural machinery. As such, these high costs are spread across the economy.