Explainer: What is the effect of the Russian oil price cap, the embargo?

FRANKFURT, Germany (AP) Western governments aim to put a price cap on Russian oil exports in a bid to reduce fossil fuel revenues. Which supports Moscow’s budget and army and the invasion of Ukraine.

The cap is set to go into effect on December 5, the same day the European Union will impose a boycott on most Russian oil. – Its crude, which is shipped by sea. The EU was still negotiating a price ceiling.

The two measures could have an uncertain impact on the price of oil as concerns about a loss of supply through the boycott compete with concerns about lower demand from a slowing global economy..

Here are key facts about the price cap, the EU ban and what it could mean for consumers and the global economy:

What is the price cap and how does it work?

US Treasury Secretary Janet Yellen proposed the cap along with other G7 allies As a means of limiting Russia’s profits while preserving the flow of Russian oil into the global economy. The goal is to hurt Moscow’s finances while avoiding a sharp rise in oil prices if Russian oil is suddenly pushed off the world market.

Insurance companies and other companies needed to ship the oil will only be able to deal with Russian crude if the oil is priced at or below the ceiling.. Most insurance companies are located in the European Union or the United Kingdom and may be required to share a maximum limit. Without insurance, tanker owners may be reluctant to deal with Russian oil and face hurdles in delivering it.

How will oil continue to flow into the global economy?

Global enforcement of the insurance ban, imposed by the EU and UK in previous rounds of sanctions, could take a lot of Russian crude off the market. That oil prices will rise, Western economies will suffer, and Russia will see increased profits from any oil it can ship in defiance of the embargo.

Russia, the world’s second largest oil producer, has already diverted much of its supplies to India, China and other Asian countries at discounted prices after being shunned by Western customers even before the EU embargo.

One of the purposes of the cap is to provide a legal framework to “allow the continuation of the flow of Russian oil and at the same time reduce the revenue windfall for Russia,” said Claudio Gallimberti, vice president of analysis at Rystad Energy.

He added, “It is necessary for global crude markets that Russian oil continues to find markets for sale, after the European embargo is in effect.” Absent that, global oil prices will skyrocket.

What effect will the different cap levels have?

A ceiling of between $65 and $70 a barrel could allow Russia to continue selling oil while maintaining its profits at current levels. Russian oil is trading at around $63 a barrel, a significant discount to international benchmark Brent crude.

The cap – at around $50 a barrel – would make it difficult for Russia to balance its government budgetMoscow is believed to require about $60 to $70 per barrel to do so, the so-called “fiscal break-even”.

However, that $50 cap would still be above Russia’s cost of production of $30-$40 per barrel, giving Moscow an incentive to simply continue selling oil to avoid having to shut down wells that could be difficult to restart.

What if you don’t bypass Russia and other countries?

Russia said it would not abide by the cap and would stop deliveries to countries that did. A cap drop of around $50 might be more likely to provoke such a response, or Russia could cut off the last remaining natural gas supplies to Europe..

China and India may not align with the cap, while China could form its own insurance companies to replace those banned by the US, UK and Europe..

Gallimberti says that China and India already enjoy a discount on oil and may not want to isolate Russia.

“China and India are getting Russian crude at a significant discount to Brent and, therefore, they don’t necessarily need a price cap to continue to enjoy a discount,” he said. By complying with the cap set by the G7, they risk isolating Russia. As a result, we believe that adherence to the price ceiling will not be as high.”

Russia can also resort to schemes such as ship-to-ship oil transfers to disguise its origins and mixing its oil with other types to circumvent the embargo.

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

What about the EU ban?

The biggest impact of the EU ban may not come on December 5th, as Europe finds new suppliers and Russian barrels are rerouted, but on February 5th, when Europe imposes additional bans on refinery products made from petroleum — such as diesel fuel. – enters into force.

Europe will have to switch to alternative supplies from the United States, the Middle East and India. “There will be a deficit and that will lead to very high prices,” Gallimberti said.

Europe still has many diesel cars. Fuel is also used by trucks to deliver a wide range of goods to consumers and to power farm machinery – so those higher costs will be spread throughout the economy.

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