Price Cap on Russian Oil Not a ‘Panacea’ for Global Energy Markets, Experts Warn

Price Cap on Russian Oil Not a ‘Panacea’ for Global Energy Markets, Experts Warn
An oil pump jack pumps oil in a field near Calgary, Alberta, Canada, on July 21, 2014. (Reuters/Todd Korol/File Photo)
Andrew Moran

The Group of Seven's (G-7) plan to install a price cap on Russian crude oil isn't a "panacea" for international energy markets and may worsen conditions, according to experts.

G-7 finance ministers recently agreed to institute a price cap on Russian oil in an effort to cripple the country's revenues that are helping finance its war in Ukraine. Leaders from the United States, Canada, France, Germany, the UK, Italy, and Japan believe this will achieve two objectives: negatively affect Russia and keep crude flows intact to prevent massive price surges.

Officials were short on details, such as the per-barrel price cap, which they noted would be determined "on a range of technical inputs" at a later date.

"To deliver on this commitment, today we confirm our joint political intention to finalize and implement a comprehensive prohibition of services which enable maritime transportation of Russian-origin crude oil and petroleum products globally—the provision of such services would only be allowed if the oil and petroleum products are purchased at or below a price (“the price cap”) determined by the broad coalition of countries adhering to and implementing the price cap," the G-7 said in a statement.
Oleg Ustenko, a senior economic adviser to Ukrainian President Volodymyr Zelenskyy, told Reuters that he expects the price range to be between $40 and $60.
A wellhead and drilling rig in the Yarakta oilfield, owned by Irkutsk Oil Company, in the Irkutsk region of Russia on Mar. 11, 2019. (Reuters/Vasily Fedosenko/File Photo)
A wellhead and drilling rig in the Yarakta oilfield, owned by Irkutsk Oil Company, in the Irkutsk region of Russia on Mar. 11, 2019. (Reuters/Vasily Fedosenko/File Photo)

But while G-7 members have already prohibited or reduced Russian petroleum imports, it will be challenging to get other nations on board, particularly China and India.

While speaking in an interview with CNBC on Sept. 2, French Finance Minister Bruno Le Maire noted that the price cap on Russian crude would be "quite difficult" to implement without the support of the wider international community.

"You need an outreach because we don’t want this measure to be only a Western measure," he said. "It should not be a Western measure against Russia; it should be a global measure against war."

Indian Petroleum Minister Shri Hardeep Singh Puri said in an interview with CNBC in Italy on Sept. 5 that his government is engaged in "many conversations" to assess the G-7 proposal.

“Now, what will the proposal mean? We will look at it very carefully,” Puri said, noting that India doesn't have "a moral duty" to reject Russian energy.

"I said the Europeans buy more in one afternoon than I do in a quarter. I’d be surprised if that is not the condition still. But yes, we will buy from Russia, we will buy from wherever. I have a moral duty to my consumer. Do I as a democratically elected government want a situation where the petrol pump runs dry? Look at what is happening in countries around India."

Will This Plan Work?

The reaction to the proposal has been mixed.

The Washington Post Editorial Board called it a "promising plan" to stop Russia from "swimming in cash."

"The prospect of disrupting Russia’s cash flow without disrupting global energy markets is worth the effort," it wrote.

Phil Flynn, a senior account executive at The Price Futures Group and author of The Energy Report, doubts that this will succeed because history has shown that price caps have never worked.

"They're going to withhold sale, and that's going to tighten the supplies even more, and prices will go up," he told The Epoch Times. "I don't think it's going to solve the problem. In fact, I think it could have the opposite impact in reduced supply."

Flynn, echoing the sentiment of G-7 leaders, thinks these "new sanctions under a different name" will succeed only if the entire world gets on board with it.

"And right now, that doesn't look like that's likely. So this is probably an exercise in futility," he said.

Russian Deputy Prime Minister Alexander Novak told reporters that domestic production will increase this year and that the nation will ship more oil to Asia.

Russian Energy Minister Nikolay Shulginov revealed to reporters on the sidelines of the Eastern Economic Forum in Russia’s Far East that Moscow will expand shipments of crude to Asia. He noted that the West's actions would possibly boost prices.

"Any actions to impose a price cap will lead to deficit on [the initiating countries'] own markets and will increase price volatility," Shulginov said.

Officials acknowledged that there would be retaliatory measures, although they didn't provide details.

Irina Tsukerman, a national security and geopolitical analyst at security strategy and reputational management firm Scarab Rising, noted that price caps on Russian crude are "not a panacea and not a substitute for drilling energy from the United States."

"But there could be advantages as long as the G-7 does not depend on this single idea to crush the Russian economy," she told The Epoch Times. "Oil is central to Russia's economy, particularly now, and Russia has even moved to explore sanctions circumvention through Iranian channels due to loss of revenue damaging to its economy in the long run.

“In recent years, oil has accounted for as much as 30 to 40 percent of the state budget. With the sanctions reducing the non-oil revenue by as much as 15 percent, the importance of oil has risen. At the same time, the sanctions on oil have not done much damage to Russia's oil revenue, in part because Russia has compensated from increased sales to non-Western countries such as China, India, Iran, and others. It's worth noting that Russia has been already forced to discount its oil sales by as much as 20 percent, which means the relative value has fallen dramatically.”

Tsukerman noted that several nations, such as India, have already fulfilled their demand. As a result, it's unlikely that these countries will perpetually buy additional crude, even at discounted prices.

“Russia has to rely on fewer countries,” she said.

Until the energy crisis is resolved, Tsukerman said the world will be at the mercy of the Organization of the Petroleum Exporting Countries (OPEC) and its oil-producing allies, OPEC+.

In the meantime, Europe is "[paying] a high price to achieve sufficient gas supply ahead of the winter," according to Carsten Brzeski, the global head of macroeconomics at ING.

"At the same time, it is no guarantee that shortages will not happen," Brzeski wrote. "As Europe still relies on further imports in the winter months, there is a chance that a cold winter still results in shortages. If these shortages occur, it will be at the end of the winter. However, it currently also looks as if energy supply issues could go beyond this winter into next."

October West Texas Intermediate crude futures were flat at less than $87 per barrel on the New York Mercantile Exchange. Brent, the international benchmark for oil prices, also saw the November contract flat at just less than $93 per barrel on London's ICE Futures exchange. October natural gas futures tanked by nearly 7 percent, to about $8.18 per million British thermal units.

Andrew Moran has been writing about business, economics, and finance for more than a decade. He is the author of "The War on Cash."
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