G7’s Russia cap could send oil prices up, not down

3 minute read

Britain's Prime Minister Boris Johnson, U.S. President Joe Biden, Germany's Chancellor Olaf Scholz, France's President Emmanuel Macron and Italy's Prime Minister Mario Draghi attend a meeting alongside the G7 leaders summit at Bavaria's Schloss Elmau, near Garmisch-Partenkirchen, Germany June 28, 2022. Ludovic Marin/Pool via REUTERS

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LONDON, June 28 (Reuters Breakingviews) - What’s not to like in the idea of setting a price cap on Russian oil exports? It limits the revenue Moscow has been amassing since the beginning of the war in Ukraine, cuts the European Union’s energy bill and helps control inflation, while avoiding a major disturbance of the global oil market. The G7 has launched a study of the concept. Considering the risks of a boomerang effect on prices, it needs to be rigorous.

The scheme contemplated would ban insurance on Russian oil cargo sold at a certain level lower than both Brent’s current $117 a barrel, and the $90 a barrel at which Russia’s discounted Urals crude trades. But it would have to be higher than Russia’s marginal cost of exploration, estimated at around $40 a barrel.

To work, the cap would need global buy-in, notably by countries like India or China. They have snapped up Russian oil in the last four months as the EU cut its imports. But they could find cheaper insurance alternatives than those provided by the EU and the UK. And nothing would prevent them from buying Russian oil at cap-plus prices. The United States and its allies are unlikely to be ready or able to extend sanctions to the countries that just ignore the cap.

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A poorly observed cap may at least not make oil prices spike. What might do is the difficulty of securing Russian agreement to keep exporting its oil at a forced discount. That is a bet on Russian President Vladimir Putin’s acceptance of political humiliation, in the name of his country’s economic interest. If Russia decides not to play ball, world prices will go up. Its exports currently amount to 8% of world output. A cut to 5% could cause world prices to jump by up to 30%, economist Olivier Blanchard has estimated. It’s not obvious that Saudi Arabia and the United Arab Emirates can offset this by pumping their spare capacity.

The EU is already on the way to a full embargo on Russian oil. World prices are threatened by a major economic slowdown. True, the EU has sent more than $32 billion to Moscow in oil payments since the beginning of the war. But that is money that Russia can hardly spend on anything due to financial sanctions. Setting up an effective oil price cap may prove an unnecessary effort.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)


Leaders of the Group of 7 industrialised nations agreed on June 28 to study the possibility of setting a price cap on Russian energy imports, in a bid to limit Moscow's revenue and ability to fund its war in Ukraine.

The European Union will explore with international partners ways to curb energy prices, including the feasibility of temporary price caps, according to a section of the final G7 communiqué seen by Reuters.

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Editing by George Hay and Streisand Neto. Graphic by Vincent Flasseur.

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