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EXPLAINER: What’s the effect of Russian oil price cap, ban?

FRANKFURT, Germany (AP) — Western governments aim to limit the price of Russian oil exports in an effort to limit fossil fuel revenues supporting the budget of Moscow, the army and the invasion of Ukraine.

The cap will take effect on December 5, the same day the European Union will impose a boycott on most Russian oil companies. – it is crude oil that is transported by sea. The EU was still negotiating what the price cap should be.

The twin measures could have an uncertain effect on oil prices as concerns over the boycott’s loss of supply compete with fears of lower demand from a slowing global economy.

Here are basic facts about the price cap, the EU embargo and what they could mean for consumers and the global economy:

WHAT IS THE PRICE LAP AND HOW DOES IT WORK?

US Treasury Secretary Janet Yellen has proposed the limit with other Group of 7 allies as a way to limit Russia’s revenues while allowing Russian oil to flow into the global economy. The aim is to damage Moscow’s finances while preventing a sharp rise in oil prices if Russian oil is suddenly withdrawn from the world market.

Insurance companies and other companies that need to ship oil would only be able to deal with Russian crude if the price of the oil is at or below the limit. Most insurers are based in the EU or the UK and may be required to participate in the limit. Without insurance, tanker owners may be reluctant to take on Russian oil and face obstacles in getting it delivered.

HOW DOES OIL KEEP FLOWING INTO THE GLOBAL ECONOMY?

Universal enforcement of the insurance ban imposed by the EU and UK in previous rounds of sanctions could take so much Russian crude off the market that oil prices would rise, that Western economies would suffer, and that Russia would see increased revenue from whatever oil it can ship despite the embargo.

Russia, the world’s No. 2 oil producer, has already diverted much of its supply to India, China and other Asian countries at discounted prices after Western customers shunned it even before the EU ban.

One of the purposes of the limit is to provide a legal framework “to allow Russian oil flow to continue while reducing unexpected revenue for Russia,” said Claudio Galimberti, senior vice president of analysis at Rystad Energy.

“It is essential for global crude oil markets that Russian oil still finds markets to be sold after the EU ban comes into effect,” he added. “Without it, global oil prices would skyrocket.”

WHAT EFFECT WOULD DIFFERENT CAP LEVELS HAVE?

A limit of between $65 and $70 per barrel could allow Russia to continue selling oil while keeping its earnings at current levels. Russian oil trades at about $63 a barrel, a significant discount to the international benchmark Brent.

A lower cap — around $50 a barrel — would make it difficult for Russia to balance its state budgetwith Moscow assuming it needs about $60 to $70 a barrel to do so, its so-called “fiscal break-even”.

However, that $50 cap would still be above Russia’s cost of production of between $30 and $40 a barrel, which would give Moscow an incentive to keep selling oil simply to avoid hard-to-restart wells. locked.

WHAT IF RUSSIA AND OTHER COUNTRIES DON’T COME?

Russia has said it will not observe any limit and will halt deliveries to countries that do. A lower cap of around $50 could provoke that response sooner, or Russia could cut off the last of its remaining natural gas supplies to Europe.

China and India may not agree to the limit, while China could form its own insurance companies to replace those excluded by the US, UK and Europe.

Galimberti says China and India are already enjoying discounted oil and may not want to alienate Russia.

“China and India get Russian crude at a huge discount to Brent, so they don’t necessarily need a price cap to keep enjoying a discount,” he said. “By complying with the G-7 limit, they risk alienating Russia. As a result, we believe that compliance with the price cap would not be high.”

Russia could also resort to schemes such as transferring oil from ship to ship to disguise its origin and mixing its oil with other species to get around the ban.

So it remains to be seen what effect the cap will have.

WHAT ABOUT THE EU EMBARGO?

The biggest impact of the EU embargo may not come on December 5, when Europe finds new suppliers and reroutes Russian barrels, but on February 5, when Europe’s additional ban on refinery products made from oil – such as diesel fuel – into force.

Europe will have to turn to alternative supplies from the US, the Middle East and India. “There will be a shortage and this will result in very high prices,” said Galimberti.

Europe still has many cars that run on diesel. The fuel is also used for trucking to get a huge range of goods to consumers and to run farm equipment – so that increased cost will be spread across the economy.

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