G7 cap on Russian crude could push prices up instead of down
It would need the accession of China and India, and it would be unlikely that they would be penalized for not respecting it
What’s wrong with the idea of putting a price cap on Russian oil exports? It limits the revenue that Moscow has been accumulating since the start of the war in Ukraine, reduces the European Union’s energy bill and helps control inflation, while avoiding a major disruption to the world oil market. The G7 has launched a study on the concept. Considering the risks of a price boomerang effect, you need to be rigorous.
The envisaged system would prohibit insuring cargoes of Russian oil sold above a certain level below both $117 a barrel for Brent and $90 a barrel for discount Russian crude from the Urals. But it would have to be higher than Russia’s marginal cost of exploration, estimated at about $40 a barrel.
To work, the cap would need global adherence, especially from countries like India or China. These countries have bought more Russian oil in the last four months, after the EU reduced its imports. But they could find cheaper insurance alternatives than those in the EU and UK. And nothing would prevent them from buying Russian oil at maximum prices. The United States and its allies are unlikely to be willing or able to extend sanctions to countries that simply ignore the cap.
A poorly respected cap may, at least, not cause oil prices to skyrocket. What could do so is the difficulty of getting Russia to agree to continue exporting its oil at a forced discount. It is a bet for the acceptance of a political humiliation by the Russian president, Vladimir Putin, in the name of the economic interest of his country. If Russia decides not to play, world prices will go up. Its exports represent 8% of world production. A 5% cut could send world prices up by as much as 30%, economist Olivier Blanchard has calculated. It is not obvious that Saudi Arabia and the United Arab Emirates can make up for it by pumping out their spare capacity.
The EU is already in the process of imposing a full embargo on Russian oil. World prices are threatened by a major economic slowdown. It is true that the EU has sent more than 32 billion dollars to Moscow in payments for oil since the beginning of the war. But it is money that Russia can barely spend on anything due to financial sanctions. Establishing an effective cap on the price of oil may be an unnecessary effort.
