Theme : International Relations , Economy
Paper :GS - 2 and GS - 3
TABLE OF CONTENT
- Context
- What is the Russian Oil Price Cap
- Oil Flow to the Global Economy
- Russian Response to the Cap and How does it bypass the Cap
- Oil Cap’s Impact on G-7
- Obstacles for U.S Intentions
- Implications of the Price Cap
Context : The US has proposed to cap the price of Russia’s oil exports along with other G7 allies as a way to limit Russia’s earnings while keeping Russian oil flowing to the global economy.
What is the Russian Oil Price Cap :
- The $60 per barrel cap is intended to cut Russia’s oil revenues while keeping Russian crude on the market by denying insurance, maritime services, and finance provided by the Western allies for tanker cargoes priced above a fixed dollar-per-barrel cap.
- Without insurance, tanker owners may be reluctant to take on Russian oil and face obstacles in delivering it.
- The US-proposed cap aims to hurt Moscow’s finances while avoiding a sharp oil price spike if Russia’s oil is suddenly taken off the global market.
Oil Flow to the Global Economy :
- Universal enforcement of the insurance ban, imposed by the EU and U.K. in earlier rounds of sanctions, could take so much Russian crude off the market that oil prices would spike.
- Western economies would suffer, and Russia would see increased earnings from whatever oil it can ship in defiance of the embargo.
- Russia, the world’s No. 2 oil producer, has already rerouted much of its supply to India, China and other Asian countries at discounted prices after Western customers shunned it even before the EU ban.
Russian Response to the Cap and How does it bypass the Cap :
Russian Response to the Cap :
- Russia has said it will not observe a cap and will halt deliveries to countries that do.
- It could retaliate by shutting off shipments in hopes of profiting from a sharply higher global oil price on whatever it can sell around the sanctions.
- Buyers in China and India might not go along with the cap, while Russia or China could try to set up their own insurance providers to replace those barred by US, UK and Europe.
How does Russia bypass the Cap :
- Using dark fleet: Russia also could sell oil off the books by using “dark fleet” tankers with obscure ownership, as have Venezuela and Iran.
- Blending: Oil could be transferred from one ship to another and mixed with oil of similar quality to disguise its origin.
Oil Cap’s Impact on G-7 :
- For countries that join the coalition, it would mean simply not buying Russian oil unless the price is reduced to where the cap is determined.
- For countries that don’t join the coalition, or buy oil higher than the cap price, they would lose access to all services provided by the coalition countries including for example, insurance, currency payment, facilitation and vessel clearances for their shipments.
- Most insurers are located in the EU or the United Kingdom and could be required to participate in the cap.
Obstacles for U.S Intentions :
- OPEC+ price control: Much remains to be seen on the response of the OPEC plus countries, where Russia is a major player.
- Lack of consensus: The enforcement of the sanctions would be difficult as there is no consensus among the members.
Implications of the Price Cap :
- Inflationary impacts: Initially, traders and the tanker owners would find it difficult. There might be a drop in exports and some shock in the production of necessary commodities.
- Energy insecurity: Countries all over the world will have to bear the spillover effects of the cap. The effect will be more pronounced for developing countries
FAQs :
-
What is the Ranking of Russia in the world in terms of Oil Production ?
ANS. Russia is World’s No. 2
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What are the Implications of the Price Cap ?
ANS.
- Inflationary impacts: Initially, traders and the tanker owners would find it difficult. There might be a drop in exports and some shock in the production of necessary commodities.
- Energy insecurity: Countries all over the world will have to bear the spillover effects of the cap. The effect will be more pronounced for developing countries.