The G7 has floated the idea of an oil price cap, but experts doubt how effective it would be.
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The world’s seven largest industrialized economies floated the idea of capping Russian oil prices to further reduce the Kremlin’s ability to finance its offensive in Ukraine and try to protect consumers amid rising energy prices.
The G7’s pursuit of a cap on Russian oil prices is not without its challenges, however, with energy analysts highly skeptical of the proposal’s integrity.
For its part, the Kremlin warned that any attempt to impose a ceiling on Russian oil prices would do more harm than good.
How the idea was born
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The bloc received about 25 percent of Russia’s oil imports and was one of the most important buyers for the Kremlin. Stopping these oil purchases is an attempt to damage Russia’s economy after the unprovoked invasion of Ukraine, but it is difficult to stop overnight, given how many EU countries are heavily dependent on Russian fossil fuels.
US President Joe Biden floated the idea of an oil price cap to other G7 leaders over the weekend of June 25 and 26, and his counterparts agreed to consider how to do it. The G-7 consists of the United States, Canada, France, Germany, Italy, the United Kingdom and Japan.
German Chancellor Olaf Scholz said the idea was very ambitious and needed “a lot of work” before it could become a reality.
A spokesman for the European Commission, the EU’s executive branch, said in an email to CNBC on Friday: “We share the G7 countries’ concern about the burden of rising energy prices and market volatility and how they are exacerbating inequalities at the national and international level.” “
“In this context, in line with the task given by European leaders, the Commission will continue its work on ways to limit rising energy prices, including assessing the feasibility of introducing temporary caps on import prices where appropriate,” said the same spokesman. adding that the discussions were seen as an “urgent matter”.
How might a price cap work?
Energy analysts have questioned how exactly the G7 could impose a price cap on Russian oil, warning that the plan could backfire if key consumers are not included and time could run out for it to become feasible.
“I’m one of those scratching my head,” Neil Atkinson, an independent oil analyst, told CNBC’s “Squawk Box Europe” on Thursday.
“Something like this can only work if you get all the key producers, and especially all the key consumers, to work together and then find some way to implement whatever plan you come up with,” he added.
“And the reality is that the biggest consumers of Russian oil, or among the biggest consumers of Russian oil, are China and India.”
A tanker anchored at a gas and oil dock at the Port of Constanta in Romania.
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China and India have “benefited enormously” from reduced Russian crude, Atkinson said. Russian oil is selling at a steep discount of $30 or more to international benchmark Brent crude futures at $110 a barrel – and China and India are snapping it up.
Atkinson also highlighted the lack of unity over Russia’s invasion of Ukraine, given that China and India have failed to explicitly condemn the Kremlin.
“In any case, the Russians are not going to just sit there and do nothing. They can play games with the supply of oil and indeed gas … they can mess with the G7’s head in some respect, so I think this plan is really a non-starter,” Atkinson said.
Do we really think that Russia will really accept this and not retaliate? I think that sounds like a very, very good concept in theory, but it just won’t work in practice.
Amrita Sen
Co-Founder and Director of Research at Energy Aspects
“To me, frankly, the mechanism doesn’t work,” Amrita Sen, co-founder and director of research at Energy Aspects, told CNBC’s “Squawk Box Europe” on Friday.
“They haven’t thought it through, they haven’t talked to India and China… Do we really think they’re going to agree to this? And do we really think that Russia will really accept this and not retaliate? I think that sounds like a very, very good concept in theory, but it’s just not going to work in practice.”
Sen said the idea that countries around the world are on the same page as Western politicians, especially on energy security, is “the biggest delusion right now.” She added: “I think this really needs to go.”
For Claudio Galimberti, senior vice president of energy research firm Rystad, the most direct mechanism for capping Russian oil prices is through insurance.
“The International Group of Protection and Indemnity Clubs in London covers around 95% of the global oil tanker fleet. Western countries may try to impose a price cap by allowing buyers to keep this insurance as long as they agree to pay no more than a certain price cap for Russian oil on board,” Galimberti said in a note.
“However, there are many obstacles that could derail such a plan,” he added.
Among the most obvious examples, Galimberti said, is the fact that Russia may simply decide not to sell at the prices set by the ceiling, especially if the benchmark is very low and close to cost of production.
President Vladimir Putin has already indicated his willingness to cut off natural gas supplies to so-called “enemy countries” that have refused to comply with his demands to pay for gas in rubles.
China is “the next most likely obstacle,” Galimberti said, as Beijing may decide for geopolitical reasons “to support Russia by accepting lower Russian insurance and therefore facilitate the price ceiling loophole.”
“Still, a price cap is certainly a measure worth considering at this stage, although time is running out as the EU is determined to ban Russian oil imports by the end of the year,” Galimberti said.
How did Russia respond?
Russia has warned that any attempt to cap the price of Russian oil could cause chaos in the energy market and push up commodity prices even further.
Deputy Prime Minister Aleksandar Novak on Wednesday described the move by Western leaders to consider imposing a price cap as “another attempt to interfere with market mechanisms, which can only lead to an imbalance in the market … which would lead to [a] price increase,” according to Reuters.
Novak said he was confident Russia would restore oil output to pre-sanctions levels in the coming months, largely because a significant amount of Russian crude has been diverted to Asian markets.
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