Explained: Can ‘risky’ G7 cap on Russian oil prices backfire?

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Capping the price of Russian oil would be an unprecedented action, and some analysts believe it could backfire. G7 members agreed on Friday that they want to pursue this strategy “urgently.”

How would a cap work? 

In order to keep Moscow’s profits in check while it continues its war against Ukraine, Russian oil would be bought at a discount from current market rates. However, Moscow would keep the price above the cost of production to encourage the export of the oil. 

A US Treasury official suggested that the discounted rates, which were determined separately for crude oil and refined petroleum products, may be periodically altered.

Are there any precedents? 

There have been international mechanisms designed to stop a country from exporting oil, as those currently targeting Iran and Venezuela, or to limit commerce, like the UN “Oil-for-Food” programme, which from 1995 to 2003 only permitted Iraq to sell oil to pay for food, medicine, and humanitarian needs. 

However, there has never been an attempt to impose a country with a different pricing.

Will others join the G7 plan? 

British, Canadian, French, German, Italian, Japanese, and American G7 members have already curtailed or suspended their oil purchases from Russia. 

However, participation from other nations is necessary for the strategy to succeed, especially large nations like China and India, two of Russia’s most significant trading partners. 

While the G7 proposal may lead to reduced costs, Bill O’Grady of Confluence Investment said that “China and India are already getting cheaper — cheap enough — oil.”

How will Russia react? 

Russia will need to give in to pressure and carry on exporting to the participating nations for the price cap to be effective. 

Alexander Novak, Russia’s deputy prime minister, issued a warning on Thursday, telling nations who set price caps on petroleum goods that Moscow would not supply to them. 

The price of oil increased Friday. Kilduff credited the G7 statement for that, at least in part. He claimed that it had sparked worries about a global supply shortage and a resulting harmful price increase. 

Even if they have already fallen from their peaks just after the Russian invasion in February, oil prices are still exceedingly high and unstable.

Would a cap undercut European sanctions? 

With the exception of three members, the European Union is getting ready to forbid not just the purchase of Russian petroleum as of December 5, but also the reimbursement of travel expenses to non-EU countries by European insurance. 

With regard to the insurance restrictions, O’Grady stated, “I do think that Washington is really uncomfortable,” adding that they would “really be a big deal.” 

About 90% of maritime petroleum transit is covered by British and EU parties. 

The US-initiated price-capping plan would lessen the impact of the embargo by exempting the transport of cargoes sold at a discount from the embargo. The G7 later supported the concept.

(with inputs from agencies)

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