WASHINGTON (AP) – The Group of Seven nations and Australia joined the European Union on Friday in adopting a $60-a-barrel price cap on Russian oil, a key step as Western sanctions aim to reshuffle the global oil market to prevent price increases and starve President Vladimir Putin of financing the war in Ukraine.
Europe needed to set the discounted price that other nations will pay by Monday, when an EU embargo on Russian oil sent by sea and a ban on insurance for these supplies comes into effect. The price ceiling, which was led by the wealthy G-7 democraciesaims to prevent a sudden loss of Russian oil to the world that could lead to another rise in energy prices and further fuel inflation.
US Treasury Secretary Janet Yellen said in a statement that the deal would help limit Putin̵[ads1]7;s “primary source of revenue for his illegal war in Ukraine, while maintaining the stability of global energy supplies.”
The agreement comes after a flurry of last-minute negotiations. Poland held up an EU agreement for a long time, and tried to set the limit as low as possible. After more than 24 hours of deliberations, when other EU nations had signaled they would support the deal, Warsaw finally relented late Friday.
A joint G-7 coalition statement released Friday said the group is “prepared to review and adjust the maximum price as necessary,” taking into account market developments and potential impacts on coalition members and low- and middle-income countries.
“Crippling Russia’s energy revenues is at the heart of stopping Russia’s war machine,” Estonian Prime Minister Kaja Kallas said, adding that she was glad the tariff was pushed down a few extra dollars from previous proposals. She said that every dollar the ceiling was reduced amounted to $2 billion less for Russia’s war chest.
“It’s no secret that we wanted the price to be lower,” Kallas added, stressing the differences within the EU. “A price between 30-40 dollars is what will hurt Russia significantly. However, this is the best compromise we can get.”
The figure of 60 dollars puts the limit close to the current price of Russian crude oil, which recently fell below 60 dollars per barrel. Some criticize it as not low enough to cut into one of Russia’s most important sources of income. That remains a big discount to international benchmark Brent, which fell to $85.48 a barrel on Friday, but could be high enough for Moscow to continue selling even as it rejects the idea of a cap.
It is a major risk for the global oil market to lose large quantities of crude oil from the world’s No. 2 producer. This could increase petrol prices for drivers around the world, which has caused political unrest for US President Joe Biden and leaders in other nations. Europe is already mired in an energy crisiswith governments facing protests over the soaring cost of livingwhile developing countries are even more vulnerable to changes in energy costs.
But the West has faced increasing pressure to target one of Russia’s main money makers — oil — to cut the funds flowing into Putin’s war chest and hurt Russia’s economy as the war in Ukraine drags into a ninth month. The costs of oil and natural gas increased after demand picked up after the pandemic, and then the invasion of Ukraine, energy markets were troubled, feeding Russia’s coffers.
US National Security Council spokesman John Kirby told reporters on Friday that “the tariffs themselves will have the desired effect of limiting Putin’s ability to profit from oil sales and limiting his ability to continue using the money to fund his war machine. “
However, there is more uncertainty ahead. COVID-19 restrictions in China and a slowing global economy could mean less thirst for oil. That’s what OPEC and allied oil-producing countries, including Russia, pointed to when they cut supplies to the world in October.. The OPEC+ alliance is scheduled to meet again on Sunday.
It competes with the EU embargo that could take more oil supplies out of the market, raising fears of a supply squeeze and higher prices. Russia exports around 5 million barrels of oil a day.
Putin has said he will not sell oil below a price cap and will retaliate against nations that implement the measure. However, Russia has already diverted much of its supply to India, China and other Asian countries at discounted prices because Western customers have avoided it even before the EU embargo.
Most insurance companies are located in the EU or UK and may be required to participate in the price cap.
Russia could also sell oil off the books using “dark fleet” tankers with obscure ownership. Oil can be transferred from one ship to another and mixed with oil of similar quality to hide its origin.
Even under those circumstances, the tariff would make it “more costly, time-consuming and cumbersome” for Russia to sell oil around the restrictions, said Maria Shagina, a sanctions expert at the International Institute for Strategic Studies in Berlin.
Robin Brooks, chief economist at the Institute of International Finance in Washington, said the price cap should have been implemented when oil hovered around $120 a barrel this summer..
“Since then, obviously oil prices have fallen and global recession is a real thing,” he said. “The reality is that it is unlikely to be binding given where oil prices are now.”
European leaders touted their work on price ceilings, a brainchild of Yellen.
“The EU agreement on an oil price cap, coordinated with the G7 and others, will significantly reduce Russia’s revenues,” said Ursula von der Leyen, president of the European Commission, the EU’s executive arm. “It will help us stabilize global energy prices, to the benefit of emerging economies around the world.”
Casert reported from Brussels and McHugh from Frankfurt, Germany. AP reporter Aamer Madhani contributed from Washington.