December 02, 2022
What Success or Failure Would Look like for the Price Cap on Russian Oil
For the policy to be judged a success, it will need to significantly cut Russia’s oil revenues. Since the beginning of the war in Ukraine, Russia has been selling its oil at big discounts—around $20 or $30 below the Brent benchmark price. At the very least, the price cap should lock in these discounts. The G7 will set the cap at a fixed price as opposed to a moving discount to Brent, but it reserves the right to alter its level at any time.
This initial price cap is just one arrow the G7 has in its quiver when it comes to depriving the Kremlin of its oil riches.
Ideally, the price cap should require Russia to sell its oil with even steeper discounts than already exist on the marketplace. The United States has said that it plans to keep the price cap above Russia’s marginal cost of production, which the Russian government assesses at roughly $40 per barrel. (Independent analysts believe Russia’s marginal cost of production may be much lower.) The closer the cap pushes the price of Russian oil to $40 per barrel or even below that threshold, the more successful it will be, as it will signal that Putin is generating minimal profits from oil sales.
At the same time, to be judged a success, the price cap must not inadvertently cause a spike in global oil prices. How might that happen? With US sanctions, overcompliance is the norm. Instead of abiding by American sanctions regulations precisely, companies often stay well clear of the line. In the case of the price cap, overcompliance would look like traders, insurers, or shipping firms refusing to deal with Russian oil even if it’s sold for a price below the cap. The result could be a major drop in the supply of Russian oil available on the global market, which could increase prices for everyone. (Of course, if the supply of Russian oil is squeezed but global energy prices do not increase, that would not be a problem from the perspective of the G7.) Fears of overcompliance explain why senior US officials have made compliance expectations relatively simple and have repeatedly downplayed the threat of American penalties when companies accidentally violate the policy.
Read the full article and more from Columbia SPIA.
More from CNAS
-
Podcast
Transatlantic Security / Energy, Economics & Security
From Russia with RiskHere on the Bear Market Brief, a lot of what we focus on is, simply put, risk: what might happen, and what might it mean? On this episode, Rachel Ziemba, an adjunct senior fel...
By Rachel Ziemba
-
Richard Nephew on the U.S. military strikes on Iran’s nuclear program
Podcast
Richard Nephew, expert on sanctions and Iran’s nuclear program, joins Emily and Geoff to discuss the long history of U.S. policy towards Iran, the role of sanctions in constra...
By Emily Kilcrease & Geoffrey Gertz
-
Commentary
Energy, Economics & Security / Technology & National Security
Beyond Bans: Expanding the Policy Options for Tech-Security ThreatsStuck between a rock (the fact that banning all Chinese tech that poses a risk is expensive and impractical) and a hard place (the fact that many existing mitigation proposals...
By Geoffrey Gertz
-
Video
Indo-Pacific Security / Energy, Economics & Security
75 Years Post-Korean War: Can Trust Be Rebuilt Under the New Administration?As President Lee Jae Myung begins his term, he's taking visible steps to reset the tone with North Korea: halting propaganda broadcasts and reemphasizing past military agreeme...
By Dr. Go Myong-Hyun
