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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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The Oil Price Cap Was Designed To Stop Prices Soaring

  • Officially, the price cap on Russian oil was designed to do two things, reduce Russia’s revenues and keep Russian oil flowing.
  • As oil prices soared earlier this year, the focus shifted from reducing Russia’s oil revenues to ensuring Russian oil stayed on the market.
  • Russia is preparing its response to both the price cap and the embargo, a response that could cause the price spike that Western governments fear.
oil price

The price cap on Russian oil at $60 per barrel does very little to immediately cut revenues for the Kremlin, as Western policymakers, especially those in the United States, focus more on keeping Russia’s crude flowing and preventing a plunge in global oil supply and another price spike, analysts say.   

The price cap, spearheaded by the U.S. through the G7, officially has a dual purpose - to reduce the revenues from oil available to Putin to continue the war in Ukraine, and keep oil flowing - at a lower price - to avoid a surge in oil prices as central banks continue to fight inflation with aggressive interest rate hikes. 

The idea of a price cap on Russia’s crude - first floated in March - was to punish Putin for the invasion of Ukraine by slashing the oil revenues available to Russia, energy exports being the single-largest contributor to Russian state revenues. 

U.S. Tried To Defuse Price Spike From EU Shipping Services Ban 

However, as oil and energy prices spiked in the spring and started fueling levels of inflation not seen in four decades, the policymakers started to feel that keeping oil prices lower should be the priority, sources with knowledge of how the ideas about the price cap mechanism evolved told Reuters

The U.S. Treasury’s “true motivation after March has been primarily to preserve Russian flows in the face of EU sanctions, which they don’t think were a good idea,” a source briefed on the discussions with the Biden Administration told Reuters. 

“They believed if there was an oil price spike, not only will it hurt us economically and politically, but it’ll damage Western support for Ukraine,” the source added.   

Ben Cahill, senior fellow in the Energy Security and Climate Change Program at the Center for Strategic and International Studies (CSIS), said in an analysis a week before the price cap was agreed that, “U.S. Treasury officials seem to view the price cap as a defensive move to parry the worst potential impacts of the EU services ban.”  

“Based on public comments, Treasury officials are deeply concerned about a potential price spike—so a high price cap that does little to crimp Russian oil revenue may be acceptable,” Cahill said. 

Policymakers were likely also careful not to set the cap too low, which would have created huge arbitrage opportunities and possibly tempt more actors in the physical oil market to engage in illicit outside-the-price-cap deals involving ‘dark fleets,’ he noted. 

on December 5th, the EU banned maritime transportation services from shipping Russia’s crude oil to third countries and imposed an embargo on seaborne imports of Russian oil into the EU, with few temporary derogations.

But officials and policymakers were reportedly more concerned about the ban on EU companies and EU persons involving themselves in the shipping, insurance, and vessels carrying Russian crude, without any measures to mitigate the impact on global oil supply and what would have been a price spike.

Hence, the price cap on Russian oil, which allows access to all those services provided by EU, UK, or G7 companies or persons if the crude is sold at or below a certain price. 

Russian Oil Revenues Haven’t Plunged Yet 

Set at $60 per barrel just days before the EU embargo took effect on Monday, the price cap is unlikely to immediately dent Russia’s revenues from oil—its crude is reportedly being sold at such discounts to Brent that it’s even lower than $60 per barrel, analysts say.  

China and India, Russia’s top oil customers now, haven’t joined the so-called Price Cap Coalition and continue to buy Russian crude at steep discounts. The existence of a price cap even gives buyers more bargaining power in negotiating low prices for Russian deliveries, according to traders and analysts.

According to Reuters estimates, at a $60 a barrel price cap, Russia would earn as much oil revenue as it did in the summer of 2021 before Russian troops started building near the border with Ukraine. 

In September 2022, Russia’s oil revenues fell by $3.2 billion from the previous month to $15.3 billion, due to falling crude oil prices and declining oil exports, International Energy Agency (IEA) said in its Oil Market Report for October. This was the lowest monthly oil export revenue for Moscow this year, but it’s more or less the level it earned in June or July 2021.  

Going forward, revenues could drop further, especially if the “shadow fleet” of tankers Russia amassing isn’t capable of carrying all the current volumes to buyers due to logistical and insurance issues. 


Russia could also stop trading oil with any country member of the Price Cap Coalition, as Moscow says the price cap artificially limits prices in a non-market mechanism it will not accept. 

By the end of this year, Russia expects to have legislation prepared that will ban Russian companies from selling oil to countries part of the Price Cap Coalition, Russia’s Deputy Prime Minister Alexander Novak said earlier this week.  

Russia is also preparing a response to the EU embargo and the price cap, Kremlin spokesman Dmitry Peskov said on Monday. 

“One thing is obvious - we will not recognize any price caps,” Peskov added. 

By Tsvetana Paraskova for Oilprice.com

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