Price cap on Russian crude oil

In News

• European Union and Australian proposal imposing a price cap on Russian seaborne oil recently came into effect.

More about the news

• About
  • the European Union said it would implement a plan originally floated way back in May, with the G7 and Australia also signing up on the plan to impose the price cap on Russian crude oil shipments. 
    • The price cap is pegged at $60 to a barrel for now.
• Significance of the price cap
  • When the EU first proposed the ban, the inference was that this would deal a major blow to Russia’s oil cash flows. 
  • It was also noted that the European shipping liners and insurers have long had a stranglehold on global energy markets.
• Need for a price cap:
  • If Russian oil does not make its way into the global oil market, then crude prices could potentially spike, impacting consumers in the EU and the US, alongside those in the rest of the world. 
  • The concern of an inflationary spike is very real. So, the floor price formula was decided on.
• How will it work?
  • The price cap is essentially aimed at preventing firms in signatory nations from extending shipping, insurance, brokering and other services to Russian crude oil shipments that are sold at any value above the designated per-barrel price, i.e. $60 for now. 
  • Since it came into effect on December 5, the cap will only apply to shipments that are “loaded” onto vessels after the date and not apply to shipments in transit.
• The price cap seeks to balance two contrasting objectives:
  • How to cut Russia’s oil and gas earnings, without simultaneously crimping the global supply of oil, which could stoke runaway inflation further.

Challenges & ineffectiveness of the ban:

• Only marginally below the current market price:
  • Essentially, the embargo and price cap scheme has little bite, given that it is just marginally below the current market price for Russian crude. 
  • Russian oil is already trading at a discount of about $68 per barrel as compared to $85 for Brent crude.
• Existing oil profits:
  • It took nearly 6 months for the grouping to come up with a price cap of $60, and this figure barely makes a dent in Russia’s oil profits that it is using to sustain the war with Ukraine.
• Availability of diversion routes:
  • The price cap also does not fully address blends that include Russian crudes, suggesting that there may be additional opportunities to divert Russian barrels “through refined or partially refined products.
  • The main concern for the EU and the US would be the routing of Russian oil, outside of the price cap remit, through non-European shipping channels to countries such as China, Turkey, Indonesia and India. 

India’s position

• India’s doubled trade with Russia:
  • Despite the United States-led sanctions on Russia post its invasion of Ukraine, India has decided to not just continue with, but also double its trade with Moscow in the “near foreseeable future”. 
  • Discounted price:
    • The increase in trade volumes between the two countries have mainly come on the back of sharply higher import of discounted Russian crude by India. 
  • Data on India’s oil imports:
    • India, which imported less than 1 percent of its total crude from Russia before the Russia-Ukraine war, now imports over 20 per cent of its total requirement from it. 
    • Crude imports from Iraq and Saudi Arabia, which were the top two suppliers of crude to India, constitute around 21 and 16 per cent, respectively, of India’s total import.
• Sustaining India’s need:
  • As stated by India’s External Affairs Minister, as the world’s third-largest consumer of oil and gas, as a consumer where the levels of income are not very high, it is our fundamental obligation to ensure that the Indian consumer has the best possible access on the most advantageous terms to international markets. 
  • And in that respect the India-Russia relationship has worked in India’s advantage. 
• Non-committal to Price caps:
  • So, India’s stand, for now, has been to remain non-committal on any such pricing cap arrangement.

Way ahead

• India’s decision on purchasing oil from Russia will continue to be guided by its energy security requirements.
• In practice, the price cap will work only if the service providers ask their clients for proof that they have bought Russia-linked crude at a cap-compliant price.