Will the price cap work. BL Explainer: The impact of the price cap on Russian crude oil 

What is the price cap imposed on Russian oil? Which are the nations bound by the cap?

The G7 and Australia, as current members of the Price Cap Coalition, on December 2 reached consensus on a maximum price of $60 a barrel for seaborne Russian-origin crude oil, in line with the unanimous decision taken by Member States of the European Union to endorse a price level for the price cap on seaborne Russian-origin crude oil.

The cap, which will be adjustable in order to respond to market developments, will be implemented by all members of the Price Cap Coalition through their respective domestic legal processes.

While the EU’s ban on import of Russian seaborne crude oil and petroleum products remains in place, the price cap will allow European operators to transport Russian oil to third countries, provided its price remains strictly below the cap.

Seaborne Russian crude oil purchased above the price cap has a 45-day wind-down period provided it is loaded onto a vessel at the port of loading prior to December 5, and unloaded at the final port of destination prior to January 19, 2023.

What do the nations imposing the price cap hope to achieve?

The sanctions and the price cap are targeted at the Kremlin, to weaken the Russian government’s ability to finance its aggression against Ukraine. Ursula von der Leyen, President of the European Commission, said: “The G7 and all EU Member States have taken a decision that will hit Russia’s revenues even harder and reduce its ability to wage war in Ukraine. It will also help us to stabilise global energy prices, benefitting countries across the world, who are currently confronted with high oil prices.”

The cap has been specifically designed to further reduce Russia’s revenues, while keeping global energy markets stable . It will, therefore, also help address inflation and keep energy costs stable at a time when high costs — particularly elevated fuel prices — are a concern in the EU and across the globe.

The price cap for crude will take effect after December 5 and for refined petroleum products, after February 5, 2023 — the price for refined products will be finalised in due course.

Will the price cap impact India’s oil trade?

Though the price cap and the EU sanctions do not target India directly, they will have an indirect impact as ferrying this crude will become difficult as the financial services sanctions have kicked in.

If a third country flagged vessel intentionally carries Russian oil above the price cap, EU operators will be prohibited from insuring, financing and servicing it for the transport of Russian oil or petroleum products for 90 days after the cargo purchased above the price cap has been unloaded.

If an EU flagged vessel violates the price cap, it will be subject to the consequences that follow under each member state’s national legislation.

Also, the price cap does not affect in any way the full EU import ban on Russian crude and petroleum products (which kicks in on Febraury 5) and the specific exceptions and derogations thereunder, which were agreed in previous sanctions packages.

Will Russia be affected by this move?

Opinions are divided on the issue. If large consumers like China and India continue to purchase oil from Russia, the impact will not be huge. Besides, Russia generally plays politics over gas, not oil.

Will the cap impact oil demand-supply globally? Are global prices likely to be impacted?

Yes, it will if adequate supplies are not made available to replace Russian oil. The oil market will see a price distortion.

What is OPEC+ likely to do?

OPEC+ has so far cleverly managed the supply side, while ensuring that prices do not fall very low. According to reports, the group may “stand pat” while adopting a wait-and-watch approach.

Is this good or bad for India?

India has been firm in its stand — it will buy from wherever cheap oil is available. If India continues to buy at a discount, which it currently gets from Russia, it will be advantage New Delhi and the Finance Minister will be happy as a smaller crude import bill will reduce the strain on the Budget.