EXPLAINER: What is the impact of the Russian oil price cap, ban?

Frankfurt, Germany — Western governments are aiming to cap the price of Russia’s oil exports in order to limit the fossil fuel revenues that fund Moscow’s budget, military and invasion of Ukraine.

The cap is due to come into effect on December 5, the same day the European Union will boycott most of Russia’s oil – its crude, which is shipped by sea. The EU is still negotiating the upper price limit.

The two measures could have an uncertain impact on oil prices as worries of lost supply from the boycott compete with fears of lower demand from a weakening global economy.

Here are basic facts about the price cap, the EU embargo and what it could mean for consumers and the global economy:

WHAT IS THE PRICE CAP AND HOW WOULD IT WORK?

US Treasury Secretary Janet Yellen has proposed the cap with other Group of 7 allies to limit Russia’s revenues while maintaining Russian oil flow into the global economy. The goal is to damage Moscow’s finances while avoiding a sharp rise in oil prices if Russia’s oil is suddenly withdrawn from the world market.

Insurance companies and other companies needed to transport oil would only be able to trade Russian crude if the price of oil is at or below the cap. Most insurers are based in the EU or the UK and could be required to participate in the cap. Without insurance, tanker owners may be reluctant to take on Russian oil and face obstacles in delivery.

HOW WOULD KEEP OIL FLOWING INTO THE WORLD ECONOMY?

Global enforcement of the insurance ban imposed by the EU and UK in previous rounds of sanctions could take so much Russian crude off the market that oil prices would skyrocket, Western economies would suffer and Russia would see increasing revenues from any oil it could would ship despite the embargo.

Russia, the world’s second-biggest oil producer, has already diverted much of its shipments to India, China and other Asian countries at discounted prices after Western customers avoided it even before the EU ban.

One purpose of the cap is to provide a legal framework “to continue the flow of Russian oil while reducing windfall revenue for Russia,” said Claudio Galimberti, Rystad Energy’s senior vice president of analysis.

“It is crucial for global crude oil markets that Russian oil finds outlets even after the EU ban comes into effect,” he added. “Without this, global oil prices would skyrocket.”

WHAT EFFECT WOULD DIFFERENT CAP LEVELS HAVE?

A cap of between $65 and $70 per barrel could allow Russia to continue selling oil while keeping its profits at current levels. Russian oil is trading at around $63 a barrel, a significant discount to international benchmark Brent.

A lower cap — at around $50 a barrel — would make it harder for Russia to balance its budget, which Moscow estimates will require around $60-$70 a barrel, its so-called “fiscal break-even.”

However, this $50 cap would still be above Russia’s production costs of $30-$40 per barrel, giving Moscow an incentive to keep selling oil just to avoid having to cap wells, which may be difficult to get back into service.

WHAT IF RUSSIA AND OTHER COUNTRIES DO NOT PARTICIPATE?

Russia has announced that it will not observe any cap and will stop deliveries to countries that do. A lower cap of around $50 could be more likely to provoke this reaction, or Russia could halt the last of its remaining natural gas supplies to Europe.

China and India could not join the cap, while China could set up its own insurance companies to replace those excluded by the US, UK and Europe.

Galimberti says China and India are already enjoying discounted oil and may not want to alienate Russia.

“China and India get Russian crude at a huge discount over Brent, so they don’t necessarily need a price cap to continue enjoying a discount,” he said. “By complying with the cap set by the G-7, they risk alienating Russia. As a result, we believe compliance with the price cap would not be high.”

Russia could also turn to schemes such as B. Transporting oil from ship to ship to disguise its origin and mixing its oil with other species to circumvent the ban.

So it remains to be seen what effect the cap would have.

WHAT ABOUT THE EU EMBARGO?

The biggest impact of the EU embargo may not come on December 5, when Europe finds new suppliers and Russian barrels are diverted, but on February 5, when Europe’s additional ban on oil-derived refinery products – like diesel fuel – comes into effect .

Europe will have to turn to alternative supplies from the US, the Middle East and India. “There will be a shortage and this will lead to very high prices,” Galimberti said.

In Europe there are still many cars that run on diesel. The fuel is also used for trucking, to bring a wide range of goods to consumers, and to power farm machinery – allowing these higher costs to be spread across the economy.

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