The West is trying hard to set a limit on oil prices that will hurt Russia

• This would make it harder for countries like China and India, which buy a lot of oil from Russia, to keep buying millions of barrels of oil every day.
• The oil price cap is meant to change that.
• Tankers carrying Russian oil could get help with shipping and insurance, as long as the oil is bought at or below the price cap set by Western countries.

Allies of Ukraine want to cap how much Russian oil can cost. But there’s a problem: They can’t agree on a number that would really put pressure on the Kremlin.

Early this year, the biggest economies in the West agreed to put a cap on the price of Russia’s most valuable export and promised to work out the details by the beginning of December. The goal of the move is to stop money from going into President Vladimir Putin’s war chest without putting more pressure on the world economy by cutting the supply of energy even more.

But as the deadline gets closer, countries still can’t agree on where the limit should be set.

Media reports this week from a gathering of European diplomats indicated that Russian oil could be capped at between $65 and $70 per barrel. Yet this range is controversial, since it’s close to the current market price of Russian crude. That would mean limited disruption to supply, but also limited pain for Russia.

“At this price point, it’s about inflation reduction instead of Russian revenue reduction,” said Helima Croft, head of commodity strategy at RBC Capital Markets.

At the beginning of the month, a barrel of Russia’s Urals crude cost just over $70, about $24 below Brent, the international benchmark.

Lowering the price, on the other hand, could make the global energy crisis worse, especially if Russia responds in kind. If it cut production more than expected, fuel prices would go up at a time when countries like the US, Germany, and Japan are trying to bring inflation down.

Putin said on Thursday that plans by the West to put a cap on oil prices would have “serious effects” on the energy markets.

Is the cost fair?

Ursula Von der Leyen, the head of the European Commission, said on Thursday that she was “confident” that the G7 and other major partners would soon agree to a global price cap on Russian oil. US Vice President Joe Biden said that talks about putting a cap on oil prices are “in play.”

But the policy debate is taking a long time, which shows how hard the work is.

Countries want to come to a deal before December 5, when Europe’s ban on shipping Russian crude by sea goes into effect. That’s because the EU sanctions package also says that ships carrying Russian crude can’t get insurance or other services from the EU.

This would make it harder for countries like China and India, which buy a lot of oil from Russia, to keep buying millions of barrels of oil every day. Most crude transport insurance companies are based in Europe or the UK, which works with Brussels.

The oil price cap is meant to change that. Tankers carrying Russian oil could get help with shipping and insurance, as long as the oil is bought at or below the price cap set by Western countries.

“This will help reduce Russia’s income even more, while keeping energy markets around the world stable by keeping supplies going,” the European Commission said. “It will also help fight inflation and keep energy prices stable at a time when high prices, especially high gas prices, are a big worry.”

Friday, Volodymyr Zelensky, the president of Ukraine, said that the limit should be set at $30 instead.

“We hear that the cap per barrel should be set at $60 or $70. “These words sound more like a concession to Russia,” he said at a conference in Lithuania, where he was speaking through a video link.

But if the price is too low, Russia could strike back and stop making as much. According to the International Energy Agency, Russia’s exports in 2022 are expected to be 9.7 million barrels per day. This could cause a stir on the market. That’s more than in the year 2021.

Change is inevitable.

The price level is not the only problem. Setting a fixed range for the price cap, instead of tying the discount for Russian crude to where Brent is trading, could cause problems in terms of logistics, since it would have to be changed often.

Giovanni Staunovo, an analyst at UBS, says that oil traders are also not sure that the measure can be put into place. He thinks that people will just look for ways to get around the rules.

He said, “There is a strong need to do something.” “But things won’t be like that.”

Some analysts think that the price cap will be less important in the long run than the oil embargo in Europe. The bloc has been buying about 2.4 million barrels of crude oil per day from Russia, but soon it will have to look for other buyers.

To cut down on extra barrels, it’s likely that output will go down. No matter what, this could make oil prices go up.

In a note to clients, Commerzbank said, “Due to the EU oil embargo and the planned price cap on oil from Russia, oil production in Russia is likely to be cut by a lot.” “The price of Brent oil should go up in the coming weeks because of this.”

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