G7 finance ministers want to push through price caps on Russian oil

There could be exceptions to this in the future – but only if the transported oil is bought for a price below the set limit, Lindner explained the idea. Discussions would still have to be held on the “technical, practical details”.

The G7 itself undertakes to implement the price cap quickly in their own countries. The finance ministers of the G7 did not initially commit themselves to an exact upper limit. The cover should be communicated transparently and its effect closely monitored. There is speculation on the market about a limit of 60 to 65 dollars per barrel. The price would be just high enough for Russia to keep up the production. Most Russian oil wells are just breaking even in this range.

Price cap should take effect at the turn of the year

Welcoming the decision, US Treasury Secretary Janet Yellen said: “Today’s action will help deal a serious blow to Russia’s finances.” accelerate”.

The question is, however, what a price cap agreed in the G7 circle will bring. In the spring, the USA decided to ban imports of Russian oil. The EU, which has so far imported far more oil from Russia than the United States, also managed to boycott it a few months later. It should come into force at the turn of the year. Only then, according to the G7 resolution, should the price cap take effect.

A buyer cartel requires purchasing power. It remains unclear how the G7 intends to dictate prices to the Russians if they buy little or no Russian oil. “That doesn’t make sense,” confirms Giovanni Staunovo, a commodity expert at UBS.

A price cap would have made sense above all as an alternative to a boycott: if the Europeans had continued to import oil from Russia, it would have been easier to enforce price reductions thanks to their own market power.

Making it difficult to transport Russian oil

In early summer, the US government tried to dissuade the Europeans from a boycott. At that time, Finance Minister Yellen had proposed a “price mechanism” to prevent “price jumps”.

The high fuel prices in the USA are a serious problem for the government in Washington. Congressional elections are coming up in the fall. US President Joe Biden’s Democrats are at risk of losing their majority in the House of Representatives and possibly also in the Senate.

>> Read here: Biden’s Comeback – Why the US President is catching up in polls

The G7 must now rely on making the transport of Russian oil more difficult. In essence, this is intended to force Russia to sell oil to large buyers such as India at a significantly lower price in the future.

A possible lever are important services such as insurance for oil transport. These are largely in Western hands. However, Russia has recently significantly increased its exports to countries such as India and China, despite Western sanctions.

Nevertheless, the G7 hopes that it will be possible to relax the global oil markets and cushion the effects of the Ukraine war on energy prices. In the next step, EU Commission President Ursula von der Leyen also wants to cap the price of natural gas that flows to Europe via pipelines. She was “deeply convinced” that the time had come for this step, said the CDU politician at a meeting of the Union faction leaders in Murnau.

The idea has been discussed in Brussels for some time, but the federal government has so far resisted it. She did not want to give Russia an excuse to cut off gas supplies. Most recently, however, the Russian energy company Gazprom had drastically reduced gas exports to Germany.

Russia threatens to stop deliveries

In response to the G7 idea, Russian Deputy Prime Minister Alexander Novak, responsible for energy issues, announced: “If they impose a price cap, we will simply not supply oil and oil products to such companies or countries that impose restrictions.” Russia will “not to not work under market conditions,” said Nowak in Moscow, calling the G7 proposals a “complete absurdity”. Attempts to cap oil prices would “completely mess up the market,” Moscow’s deputy prime minister warned.

Meanwhile, Russia is becoming more and more dependent on its oil and gas exports: The share of the energy sector in the total gross domestic product had already risen to a record 21.7 percent in the first quarter – since then oil and gas prices have continued to rise significantly and with the proceeds the share on GDP. At the same time, the processing industry, such as automobile construction, is shrinking considerably because of the sanctions.

However, from the point of view of UBS expert Staunovo, the concept of a price cap has another shortcoming: countries such as India or China, which are currently buying large quantities of Russian oil, would have no incentive at all to join the buyers’ cartel. Russia’s President Putin had already threatened to no longer want to supply countries that join the buyers’ cartel. But even otherwise, India and China would hardly have any advantages in joining the punitive measures, explains Staunovo. “The price cap would increase demand for Russian oil.”

The amount that China and India could get from Russia would decrease. As a result, they would have to buy more oil at significantly higher world market prices. According to Staunovo, the countries might then have to pay more overall than they do now. Currently, China and India are buying Russian oil at a $20 per barrel discount to the price of Brent oil, he estimates. Brent is priced at around $95.

The price caps are also seen as an indication that the West is reluctant to impose even stronger sanctions for fear of driving up prices again and thus fueling inflation. Robin Brooks, chief economist at the Institute for International Finance, has been calling for months to stop Greek tankers transporting Russian oil. This, he argues, is the most efficient way to meet Russia’s export earnings. But the G7 states apparently do not want to risk renewed chaos on the oil market.

More: Read all current developments in the energy crisis in the news blog