Price cap on Russian oil

Price cap on Russian oil

Subject :International Relations

Context: The Group of Seven nations and Australia agreed Friday to adopt a USD 60-per-barrel price cap on Russian oil, acting shortly after the European Union reached unanimous agreement on the same price earlier in the day.

Concept:

Background:

• In the context of the Russia-Ukraine war, U.S. Treasury Secretary Janet Yellen has proposed a price  cap with other Group of 7 allies as a way to limit Russia’s earnings while keeping Russian oil flowing to the global economy and to limit its oil revenues.
• The European Union also decided to impose a boycott on most Russian oil, its crude that is shipped by sea.

Objective of the price cap:

• To curb Russia’s  ability to fund the war in Ukraine and limit the impact on global energy prices, particularly for low and middle-income countries.
• To avoid a sharp oil price spike if Russia’s oil is suddenly taken off the global market.

Consequences of Russian oil price cap

• Insurance companies and other firms needed to ship oil would only be able to deal with Russian crude if the oil is priced at or below the cap. Most insurers are located in the EU or the United Kingdom and could be required to participate in the cap.
• If Russian crude were off the market that oil prices would spike, Western economies would suffer, and Russia would see increased earnings from whatever oil it can ship in defiance of the embargo.
• Russia has threatened to stop supplies to anyone participating in the plan led by the United States on the price cap of Russian crude oil.
• Russia, the world’s No. 2 oil producer, has already rerouted much of its supply to India, China and other Asian countries at discounted prices. A $60 cap would not have much impact on Russia’s finances as Russian Urals blend sells at a significant discount to international benchmark Brent and fell below $60 hence it will not affect the global price.

Impact on India

Russia has emerged as the third largest supplier to the energy import-dependent nation in FY23.India gets Russian oil at an average discount of around $15-20 per barrel on a delivered-at-place (DAP) basis, wherein the seller bears the transportation cost, insurance and risk for delivering at the designated port.

• Shipping, freight, customs, and insurance costs are not included in the price cap and must be invoiced separately and at commercially reasonable rate
• Indian refiners are already getting Russian oil at below price cap.Even for delivered crude, India is paying $15-$20 a barrel below Brent.
• India is now turning to Africa and the Middle East instead of Russia due to higher freight rates by diversifying its sources in order to ensure energy security.