Consequences for the energy market: will the price cap for Russian oil have no effect?

Consequences for the energy market
Is the price cap for Russian oil having no effect?

An oil price cap would ban companies from transporting or insuring Russian oil sold above a set price. He is said to be Russia’s onetake from exports – and with it the financial means to continue the offensive in Ukraine. In an interview, raw materials expert Klaus-Jürgen Gern explains what needs to happen for the measure to take effect and why it doesn’t make sense to simply set the cap to zero. What are the G7 and the European Union hoping for from a price cap on Russian oil?

Klaus-Jürgen Gern: The price cap is intended to reduce Russia’s chances of benefiting from the high energy prices and improving its public finances. And without the supply of oil in the world being massively restricted at the same time. That’s the risk of imposing an embargo. As soon as there is no oil on the world market, this leads to major tensions in the markets and rising prices. This is to be prevented by allowing the Russians to sell oil, but at a price that is not too high.

How is the lid supposed to work?

Klaus-Jürgen Gern is a raw materials expert at the Kiel Institute for the World Economy.

The leverage that the G7 countries have is in particular the transport of the oil. The majority of the global tanker fleet sails under the flags of these industrial nations. In addition, an even larger proportion of insurance payments come from these countries. Cargoes destined for countries such as India or China but on European tankers or with European insurance would also be affected.

A range of 65 to 70 dollars per barrel is under discussion for the price cap. How useful is this height?

A price in this range would have no effect at the moment. Because the Russians are currently selling their oil at lower prices. The spot price for Urals oil is roughly at the lower end of this range – in some cases even lower. Longer-term contracts with large customers also have a discount. They would not be affected at all by a price cap on Russian oil. Introducing the cap anyway can make sense just to see how Russia would react to it.

In order for the oil price cap to take effect, the G7 cannot avoid a much lower price?

The question here is: What is the goal? If the G7 wants to hit the Russians by reducing their revenues from crude oil, the price would have to be pushed below the level that Russia needs to finance its budget with oil revenues. The threshold is estimated at around 60 US dollars. Should the price be well below this mark, it would cause real difficulties for the Russian state budget. We have seen that Russia has run into severe government deficits and a severe recession during periods when the market price of oil has fallen below this threshold. For the hawks in this discussion, who are in Eastern Europe, for example, this is a reason to call for a significantly lower cap. In this way they want to damage Russia economically.

Why don’t we set the cap to zero euros right away?

That would lead to Russia not offering any more oil. Anyone who still buys Russian oil will then have to look for other oil. The consequence of this would be that the prices for it would also rise drastically.

Russian President Putin recently warned that an oil price cap could have “serious consequences” for the energy market. What is he alluding to?

The scenario that Putin is suggesting is that Russia either can no longer sell its oil or does not want to sell it to states that participate in this cap. The Russian side has repeatedly stressed that it will stop selling to such countries. As already mentioned, the lack of oil on the world market leads to shortages and higher prices. The Americans in particular want to prevent this with the oil price cap. They want to keep Russian oil on the market, just not at prices that would allow Russia to make the so-called chance profits that are possible given current energy prices.

Could the new sanctions be monitored at all?

The procedures that are now being rumored are being softened more and more. For example, the insurance companies only need a certificate from the shipping company that their cargo does not exceed the oil price cap. It is not checked and the insurance company is not responsible for the fact that the information is correct. It will also be very difficult for the shipping companies to check whether the oil price cap is being adhered to.

What are the options for bypassing the lid?

Large shipping companies could try to flag out their ships and offer insurance from other countries. Even the Russians themselves could offer insurance to circumvent the oil price cap, thereby dulling the sword over time.

What are the penalties if companies circumvent sanctions?

That’s not really foreseeable yet. However, the big players are usually extremely cautious. Established shipping companies in particular are concerned that sanctions could affect their company. With the EU and the USA, very important parts of the global economy are on board, which one does not want to lose as customers or potential business partners. The effect of the measure could be noticeable, especially at the beginning, but diminish over time when the rules and their interpretation and thus also ways of circumventing them become clear.

What does the success of the oil price cap ultimately depend on?

If the goal is to drastically reduce Russia’s oil revenues, this will not be achieved if the cap is set at a relatively high oil price. But if the goal is not to destabilize world markets, then the price must not be set too low.

Juliane Kipper spoke to Klaus-Jürgen Gern

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