G7 Leaders Lay Groundwork for Oil 'Price Cap'

Leaders gathering for the G7 meeting in Europe are reviewing the specifics of a potential “price cap” on Russian oil as Western countries attempt to limit both the energy-related revenue flowing to Moscow and the economic pain in the rest of the world.

G7 leaders are going to “acknowledge that the path forward is to urgently direct ministers to work on achieving a price cap, which can, in our judgement, best achieve both of those objectives simultaneously,” a US official told reporters.

Russia is likely to see higher revenues from energy sales this year, according to a recent Energy Intelligence analysis, although revenues could fall dramatically in 2023.

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The US official focused on the services that firms in Western countries provide to transport Russian oil, although advocates of a price cap have suggested different mechanisms since Russia invaded Ukraine in February.

“While we are — in the US, the EU, Canada, the UK — implementing our own oil embargoes on Russian oil, we collectively have a set of tools that can go to the services that are provided to allow Russian oil to be transported elsewhere in the world,” the official said.

One method could involve applying secondary sanctions on importers that pay more than a specified level for Russian crude.

Another recent suggestion involves modifying the EU’s forthcoming prohibition on providing shipping insurance for Russian crude to only prohibit such transactions if they breach a certain price level.

Immediately after Russia invaded Ukraine, US officials sought to limit the economic damage that might be done by sanctioning a major oil producer. The focus was initially on financial sanctions, but that quickly changed as political momentum built to hit out at Russia’s energy sector. The Biden administration put an embargo on Russian oil within two weeks of the invasion, and Europe put forward its own embargo last month.

Enforcement Questions

The price cap idea has its skeptics, with some European sources pointing out the complexity of trying to control how much Russia is paid for its exports by buyers in Europe and around the world.

“We shouldn’t create, you know, a global black market for crude oil,” Polish Energy Envoy Piotr Naimski said last week at an event at the Atlantic Council.

To have the effect Western officials are looking for, a price cap would also require participation from countries like China and India, enforced by the threat of sanctions.

China’s imports of Russian oil increased by 25% between April and May, to 2 million barrels per day. India’s imports of Russian oil hit 850,000 b/d in June, a dramatic increase over the 2021 average below 50,000 b/d.

But advocates say the price cap could align the interests of energy-hungry countries keen for discounted fuel with those who want to limit the financial flows to Moscow, promising a scenario where they might be able to pay even less.

“We need a broad coalition” for a price cap, European Commission President Ursula von der Leyen said Friday.