OIL PRICE CAP

1. Context

Oil prices surged after a group of seven G7, European Union, and Australian proposals imposing a price cap on Russian seaborne oil came into effect.

2. How Is Price Cap Intended To Work

The cap is aimed at preventing firms in signatory nations from extending shipping, insurance, brokering, and other services to Russian crude shipments sold for more than  60 $ per barrel. The cap applies to shipments that are loaded onto vessels, not to shipments in transit.

3. Problem

• It took six months for the EU and US to agree underlies the complexity of the proposal and disagreement within the western alliance.
• If Russian oil does not make its way into the global market, the crude price could potentially spike, impacting consumers in the EU, the US, and the rest of the world.

4. Cap Effect

• Russian oil is already trading at a discounted price of about $68 per barrel compared to $ 85 for Brent. Also, $60 is way more than the cost of production of Russia‘s main crude variants, which is $20-44per barrel .with this monetary cushion even with a $60 cap, Moscow will continue to have a commercial reason that is willing to buy.EU leaders have been saying that the cap may be lowered over time.
• The fact remains it took nearly six months for the west to agree on $60 and in the end, it barely makes a dent in the oil profit that Russia is using to sustain the war with Ukraine.
• Even at $ 45, Moscow would have the incentive to keep selling crude simply to avoid having to cap wells that can be tough to restart from the point of view of economic viability.

5. Logistics Issues

• The shipping industry can misrepresent or obscure the origin of its cargo
• Exemptions for certain pieces of the Russian production complex –including the Sakhalin -2 project that was heavily funded by Japan-suggest there will be "uncapped" Russian barrels still floating into the market.
• The price cap does not fully address blends that include Russian crudes –so there may be additional opportunities to divert Russian barrels “through refined or partially refined products.
• In practice, the price cap will work only if service providers ask their clients for proof that they have bought Russia –linked crude at a complaint price.

6. Russia Energy Revenue Position

• Russia's export revenues have fallen since the second quarter of 2022, due to an easing of global oil prices and lower gas sales after it decided to cut flows to Europe through the sabotaged Nord Stream pipeline.
• Even then, Moscow’s current account surplus this year is projected to be more than $250 billion, second only to China’s.
• At current crude prices, the $ 60 price cap does not impact Russia's earnings for now.

7. India’s Position

• India has decided to not just continue but double its trade with Russia in the near foreseeable future.
• For now, New Delhi has been non–committal on any pricing cap arrangement.

Source: The Hindu