Failure to agree on a price cap for Russian oil will push international prices higher, a U.S. government official has warned, adding that the cap would need to be accompanied by sanction exemptions.
In a report quoting the unnamed official, Reuters wrote that the idea of the price cap was to set a price for Russian oil that covers the marginal costs of its production as a way of motivating Russia to continue exporting that oil, even at much lower than international prices.
Failure to do so means that sanctions on Russian crude oil will significantly curb its exports, which would in turn lead to a price spike, the official said, foreseeing prices of $140 per barrel.
G7 leaders discussed the price cap at its meeting in June, where it concluded that for the idea to be successful, its authors would need to get big importers such as China and India on board. So far, there has been little indication that either India or China would be willing to join the price cap.
Meanwhile, discussions are ongoing about the actual level of the cap. According to the U.S. official that Reuters spoke to this week, Japan had been concerned about setting the cap too low but had agreed to consider a range between $40 and $60 per barrel.
U.S. Treasury Secretary Janet Yellen is traveling to Asia this week, where she will try to garner support for the price cap idea among local importers. China is notably absent from her itinerary.
Analysts have warned that the oil price cap idea is not the most brilliant one because there is no guarantee Russia will accept the cap and continue business as usual. On the contrary, there is concern it would retaliate by slashing oil exports, which would push international prices much higher.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More
Comments
President Putin will be happy for the G7 countries to agree a cap because this is the surest way of enabling him to make more money from his oil exports, exactly the opposite of what the price capping intends to do.
What Russia could in effect do is to halt supplies of its crude oil and petroleum products to Western nations while continuing to sell vast volumes of its oil exports to China and India. This will cause oil prices to surge further probably to $120-$130 a barrel thus inflicting considerable damage on the nations suggesting a cap on prices.
Western leaders don’t realize how robust Russia’s fiscal position is and how resilient its economy also is. Russia can afford to slash crude oil exports by more than 3.0 million barrels a day (mbd without affecting Russia’s revenues and economy.
Even without any new Western sanctions and more follies, the single most important problem that is adversely impacting global supplies and prices is the ever-shrinking global spare capacity which is running very low. This will keep the market on edge and also send crude oil prices in a steep upward trajectory soon.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
Let's mark that as understatement of the month.