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Russia’s oil price cap is no ‘panacea’ for global energy markets, experts warn

The Group of Seven (G7) plan to impose a price cap on Russian crude oil is not a “panacea” for international energy markets and could worsen conditions, experts say.

G7 finance ministers recently agreed to institute a price cap on Russian oil in a bid to cripple the country’s revenues that help pay for its war in Ukraine. The leaders of the United States, Canada, France, Germany, United Kingdom, Italy and Japan believe that this will achieve two objectives: negatively affect Russia and maintain the flow of crude intact to avoid massive price spikes.

Officials lacked details, such as the cap on the price per barrel, which they said would be determined “over a range of technical inputs” at a later date.

“To fulfill this commitment, we confirm today our common political intention to finalize and implement a comprehensive ban on services that allow the maritime transport of crude oil and petroleum products of Russian origin around the world – the supply of such services would only be permitted if petroleum and petroleum products are purchased at or below a price (“the price cap”) determined by the broad coalition of countries adhering to and implementing the price cap,” the G7 said. in a press release. statement.

Oleg Ustenko, Senior Economic Advisor to Ukrainian President Volodymyr Zelenskyy, informed Reuters that he expects the price range to be between $40 and $60.

A wellhead and drilling rig at the Yarakta oilfield, owned by Irkutsk Oil Company, in the Irkutsk region, Russia, March 11, 2019. (Reuters/Vasily Fedosenko/File Photo)

But while G7 members have already banned or reduced imports of Russian oil, it will be difficult to get other countries on board, particularly China and India.

During an interview with CNBC on September 2, French Finance Minister Bruno Le Maire conceded that the Russian crude price cap would be “quite difficult” to implement without the support of the wider international community.

“You need awareness, because we don’t want this measure to be just a Western measure,” he said. “It shouldn’t be a western measure against Russia, it should be a comprehensive measure against war.”

Shri Hardeep Singh Puri, Indian Oil Minister Explain in an interview with CNBC in Italy on September 5, that his government is engaged in “many conversations” to assess the G7 proposal.

“Now, what will the proposal mean? We will consider it very carefully,” he said, adding that India has no “moral duty” to reject Russian energy.

“I said that Europeans buy more in an afternoon than I do in a quarter. I’d be surprised if that’s not the condition yet. But yes, we will buy from Russia, we will buy from anywhere,” Puri said. “I have a moral duty towards my consumer. As a democratically elected government, do I want a situation where the gas pump is running dry? Look what is happening in countries around India.

Will this plan work?

Reaction to the proposal was mixed.

The Washington Post editorial board called it a “promising plan” to prevent Russia from “swimming in money”.

“The prospect of disrupting Russia’s cash flow without disrupting global energy markets is well worth it,” he wrote.

Phil Flynn, senior account manager at The Price Futures Group and author of The Energy Report, doubts it will succeed, as history has shown that price caps have never worked.

“They’re going to suspend the sale, and that’s going to tighten supplies even more, and prices are going to go up,” he told The Epoch Times. “I don’t think that will solve the problem. In fact, I think it could have the opposite impact in terms of supply reduction.

Flynn, echoing the sentiment of G7 leaders, believes that these “new sanctions under a different name” will only succeed if the whole world gets on board.

“And at the moment it doesn’t seem likely. So it’s probably an exercise in futility,” he added.

Russian Deputy Prime Minister Alexander Novak Told journalists that domestic production will increase this year and that the country will ship more oil to Asia.

Russian Energy Minister Nikolay Shulginov told reporters on the sidelines of the Eastern Economic Forum in Russia’s Far East that Moscow would increase crude shipments to Asia. He added that actions from the West could eventually push prices higher.

“Any action to impose a price cap will result in a deficit on [the initiating countries’] own markets and will increase price volatility,” Shulginov said.

Officials acknowledged there would be retaliation, although they did not provide details.

Irina Tsukerman, national security and geopolitics analyst at security strategy and reputation management firm Scarab Rising, noted that the Russian crude price cap is “not a panacea and does not replace the ‘drilling energy in the United States’.

“But there could be benefits as long as the G7 doesn’t depend on this idea alone to crush the Russian economy,” she said.

“Oil is at the heart of the Russian economy, especially now, and Russia has even decided to explore circumventing sanctions through Iranian channels due to the loss of revenue that is detrimental to its economy in the long term,” he said. Tsukerman told The Epoch Times.

“In recent years, oil has represented up to 30 to 40% of the state budget. With the sanctions reducing non-oil revenue by 15%, the importance of oil has increased. At the same time, oil sanctions have not hurt Russia’s oil revenues much, partly because Russia has offset increased sales to non-Western countries such as China, India, Iran and others. It should be noted that Russia has already been forced to cut its oil sales by up to 20%, which means that the relative value has dropped dramatically.

Tsukerman added that several countries, such as India, have already responded to their request. As a result, these countries are unlikely to perpetually purchase additional crude, even at discounted prices.

“Russia needs to rely on fewer countries,” she added.

Until the energy crisis is resolved, Tsukerman argues that the world will be at the mercy of the Organization of the Petroleum Exporting Countries (OPEC) and its oil-producing allies, OPEC+.

In the meantime, Europe “pays[ing] a high price to ensure sufficient gas supplies before winter,” notes Carsten Brzeski, global head of macroeconomics at ING.

“At the same time, there is no guarantee that shortages will not occur,” he said. wrote. “As Europe is still dependent on new imports during the winter months, it is possible that a cold winter will still lead to shortages. If these shortages occur, it will be at the end of winter. However, it also seems that the energy supply problems could go beyond this winter and next.

October West Texas Intermediate (WTI) crude futures were flat at under $87 a barrel on the New York Mercantile Exchange. Brent, the international benchmark for oil prices, also saw the November contract stagnate at just under $93 a barrel on London’s ICE Futures exchange. October natural gas futures fell almost 7% to around $8.18 per million British thermal units (Btu).

Andre Moran

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Andrew Moran covers business, economics and finance. He was a writer and journalist for over a decade in Toronto, with bylines on Liberty Nation, Digital Journal and Career Addict. He is also the author of “The War on Cash”.