PRICE CAP INITIATIVE BY G7
Background
- The G7 nations, namely Canada, France, Germany, Italy, Japan, the UK, and the US, along with the European Union are currently pushing to institute a cap on the price of Russian oil.
- The Western allies hope to financially squeeze out Moscow, which has continued to benefit from soaring energy prices and cut off its means of financing the invasion of Ukraine.
- India, being the second-largest oil importer globally, has been requested multiple times to join the price cap.
- The proposed price cap will factor in the cost of production and economically incentivise Russia to keep exporting oil, as the price of oil has skyrocketed in several countries amid high inflation.
| The G7 countries, the US, UK Canada, France, Germany, Italy, and Japan, control nearly 90 per cent of insurers and vessels that Moscow relies on to transport oil. |
- Furthermore, officials have also indicated that Russia is already a part of several long-term contracts with buyers offering huge discounts, which means that the price cap mechanism will work.
The working mechanism
- Russian oil would be purchased at a discount from prevailing market prices, to limit Moscow's profits as it prosecutes its war against Ukraine.
- But it would keep the price above the cost of production to ensure incentive for its export.
| The discounted rates, calculated separately for crude oil and refined petroleum products, could be regularly revised, according to a US Treasury official. |
Will other countries join
- G7 members – Britain, Canada, France, Germany, Italy, Japan and the United States have already limited or suspended their Russian petroleum purchases.
- But for the plan to be effective, other countries will have to take part particularly big countries such as India and China, some of Russia’s most important clients.
India's stake in Russian oil exports
- The share of Russian crude oil, which was less than 1 per cent of India’s crude oil import volume.
- Before Russia invaded Ukraine in February, rose to 8 per cent in April, 14 per cent in May and 18 per cent in June, according to industry estimates and official Commerce Department data.
- Since July, India's crude oil imports from Russia have declined. But, the overall import of crude oil has also fallen.
- In August, India imported 7,38,024 barrels per day from Russia, 18 per cent lower than in July.
- Officials say that until Russia continues to compete with other major producers in offering discounts, India will continue to source from it.
Proposed price
- Experts have warned that the US-led initiative can backfire as it could push Russia to shut down its oil production causing the crude oil price in several countries to rise further.
- Experts also raised fears of a contraction in world supply and a damaging new surge in prices.
India's Stand
- India is yet to respond to the proposed initiative, while it remains one of the largest importers of oil in the world and uses imported oil to meet more than 80% of its needs.
- Furthermore, amid western sanctions imposed on Moscow, India has drawn widespread criticism for its oil imports from Russia.
| India on multiple occasions has defended its stance citing discounted rates of Russian oil and ease of burden on its economy, as the prices soared following the conflict in Ukraine. |
Russia's reaction
- For the price cap to work, Russia will have to yield to the pressure and continue exporting to the participating countries.
- But Russia’s Deputy Prime Minister warned that Moscow would not sell petroleum products to countries capping their price. Kilduff attributed that at least partly to the G7 announcement.
