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Explainer: The G7’s price ceiling on Russian oil is starting to take shape




A model of 3D-printed oil drums is seen in front of the stock graph shown going down in this illustration taken December 1, 2021. REUTERS/Dado Ruvic/Illustration/File Photo

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WASHINGTON, Sept 12 (Reuters) – The Group of Seven countries are working to cap the price of Russian oil in a bid to limit Moscow’s ability to finance its invasion of Ukraine, a plan analysts say may work in the long term but could increase oil prices in the coming months.

Officials in G7 countries, including US Treasury Secretary Janet Yellen, say the unprecedented measure, set to begin on December 5, will cut the price Russia receives for oil without reducing petroleum exports to world consumers.

Russian President Vladimir Putin could push back and cause stress in oil markets even as the plan comes together.

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Below are questions about the price cap and challenges it faces.

WHO IS IN THE PRISCAP COALITION?

The rich G7 nations – the US, Japan, Germany, the UK, France, Italy and Canada – and the EU are hammering out the details of the plan. The G7 wants to enlist other countries, including India and China, which have sourced deeply discounted oil from Russia since the February 24 invasion of Ukraine.

Moscow has managed to maintain its income through increased crude oil sales to India and China.

But even if India and China do not join, a cap could help push down prices for Asia and other consumers. US Assistant Treasury Secretary for Economic Policy Ben Harris said on September 9 that if China negotiates a separate 30-40% discount on Russian oil because of the price cap, “we consider that a win.”

Consensus on the price ceiling level will be reached with the help of a “rotating lead coordinator,” the US Treasury Department said in guidance issued on Friday suggesting that countries in the coalition will have an interim leadership role as the plan continues.

WHAT IS THE LEVEL OF THE PRICE SEA?

It will likely be weeks before the price of Russian crude and two oil products will be determined, Harris said.

Washington-based ClearView Energy Partners has said officials have talked about a range of $40-$60 a barrel for crude oil. The upper part of this range is consistent with historical prices for Russian crude, while the lower part is closer to Russia’s marginal cost of production, analysts say. read more

Coalition members with long economic and military ties to Russia could push for a higher cap, while too low a limit could take market share away from Saudi Arabia and other oil producers. “The level will be determined by both quantitative and qualitative reasons,” said Bob McNally, president of Rapidan Energy Group.

Russian crude oil is priced at a discount compared to the international Brent benchmark, and the G7 wants to keep the spread wide, in order to keep Russian oil income down.

But achieving a wide spread could mean higher prices for Western consumers as Russia is the world’s second largest crude oil exporter, after Saudi Arabia.

WHAT DOES THE G7 EXPECT FROM MARITIME SERVICES?

The plan agreed by the G7 calls for participating countries to deny Western-dominated services including insurance, finance, brokerage and navigation to oil cargoes priced across the border. read more

To secure these services, petroleum buyers would provide “certificates” to suppliers stating that they purchased Russian petroleum at or below the ceiling.

Maritime service providers will not be held liable for false price information provided by buyers and sellers of Russian petroleum, the US Treasury Department said. read more

G7 officials believe the plan will work because the London-based International Group of Protection & Indemnity Clubs provides maritime liability coverage for about 95% of the global oil shipping fleet.

Traders point to parallel fleets that can handle Russian oil using Russian and other non-Western insurance that can be used to circumvent enforcement efforts. read more

It is still uncertain how many ports around the world will accept Russian-insured ships.

Craig Kennedy, a fellow at Harvard University’s Davis Center for Eurasian and Russian Studies, said the G7 has long-term influence because Moscow is limited by a small tanker fleet versus the huge volume of exports it needs to get out. If Russia does not want to sell to the top, it may have to shut down production, which could impose long-term costs on the oil fields.

HOW COULD RUSSIA FIGHT BACK?

Putin has said Russia will withhold exports to countries that enforce the cap, and fears of the threat could push petroleum markets higher before December.

Higher prices could also be risky for US President Joe Biden ahead of the mid-term elections in November when his fellow Democrats hope to retain control of Congress.

Some analysts are concerned that Moscow could respond by taking action beyond Russia’s borders before the tariff takes effect.

“My biggest concern is that I think Putin is going to make it very, very painful going into December 5,” Helima Croft, head of global commodities strategy at RBC Capital Markets, told a Sept. 9 event at the Brookings Institution. They also have assets in other producing countries, whether it’s Libya, whether it’s Iraq, and they have an ability to cause some problems in other producing states.”

HOW WILL THE LOCOMOTIVE BE ENFORCED?

The US Treasury warned service companies to be on the lookout for red flags indicating potential evasion or fraud by Russian oil buyers. These may include evidence of deceptive shipping practices, refusal to provide requested pricing information, or excessively high service charges. read more

US Deputy Prime Minister Wally Adeyemo said on Friday that those who falsify documentation or otherwise conceal the true origin or price of Russian oil will face consequences under the national law of jurisdictions that implement the price cap.

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Reporting by Timothy Gardner; Additional reporting from David Lawder and the London energy team; Editing by Daniel Wallis

Our standards: Thomson Reuters Trust Principles.



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