The US promotes measures to limit the price of Russian oil in global markets

US Treasury Secretary Janet Yellen again condemned Russia’s attack against Ukraine while speaking to reporters in Bali, Indonesia, before the start of the G-20 finance ministers’ meeting. She said shrinking Russia’s profits from the sale of crude oil “would deny Putin the revenue he needs for his war machine.”

She also argued that limiting the price of Russian oil would help one of the main goals of the administration of US President Joe Biden: reducing inflation.

“Putting a cap on the price of Russian oil is one of our most powerful tools to address the painful burden that Americans and families around the world are feeling when they go to the gas pump and the grocery store,” Ms. Yellen said.

However, the plan to impose a price cap relies on a complicated mechanism that has never been tried before, and some experts in global energy markets have said they do not believe it will work.

Setting a price cap is linked to sanctions

The plan being proposed by US Treasury Secretary Yellen is linked to a new round of financial sanctions that the European Union, the United Kingdom and the US are preparing to impose on Russia.

To get its crude oil to market, Russia relies on various transactions with international lenders, shipping firms and insurance companies. The current plan is to cut off Russia’s access to these services by the end of this year. In theory, this would make it virtually impossible for Russia to export oil in the near term and much more difficult in the future.

If fully implemented and successful, the results of these sanctions could have negative consequences for everyone. Russia would lose its oil revenue and the rest of the world would experience potentially devastating price increases due to the shock to the oil supply from the arbitrary ban on Russian oil.

Secretary Yellen and President Biden’s administration are proposing to create an option that would allow Russia to continue selling oil. If Russia agrees to sell its oil at a price that is below a certain limit, the level of which will be determined by the countries imposing the sanctions, it will be allowed access to the services it needs to bring the oil to market.

This would avoid a shock to global oil supplies while reducing Russia’s oil revenues.

Experts have their doubts about the proposal

Global oil market experts say they don’t believe the plan to cap the price at which Russia can sell its crude will work.

Julian Lee, who works as an oil analyst for the media organization, “Bloomberg”, wrote in the Washington Post that the scheme “it has very little chance of functioning”.

He concludes that, “that probably the calculation that Putin will make is that cutting off Russian oil exports will hurt the economies of buyers in Europe more than Russia. So it is hopeless to expect him to agree to a price ceiling set by the West.”

When VOA asked Edward C. Chow, a senior fellow at the Center for Strategic and International Studies, if he believed the plan to cap the price of Russian crude oil was feasible, he had an answer. with a word.

“No”, he said.

Many ways to solve the problem

Mr Chow, who has spent 45 years working in the international oil and gas business, including 20 years with oil giant Chevron, said: “I’ve checked with every energy expert I know. And not one person thinks it can work.”

He listed a number of possible solutions, including alternative insurance arrangements, contracts that shift the risk of shipments to the seller rather than the buyer. Meanwhile, according to him, Russia can use its fleet of tankers, which is also one of the largest in the world, to avoid sanctions and thus ignore the establishment of a price limit on its oil.

Mr. Chow, who also worked as a professor at Georgetown University, said “I was impressed when I first heard this proposal as it seemed like a good idea for students to come up with, and if you understand the markets then you know that professors like this because then they have the opportunity to teach students why this idea would not work in practice”.

The US will continue with the plan

Doubts aside, President Biden’s administration appears intent on moving forward with the plan.

The Treasury Secretary said Thursday that the level at which the price cap would be set has not yet been determined, but that “We would like to set a figure that would encourage Russia to continue production, but that would still make production profitable for Russia.”

If Russia refused to accept the price, she pointed out, that country would suffer in the short term, as it would not be able to realize any income from oil that will be ready for the market. Russia would also face long-term costs associated with shutting down production and losing market share as oil buyers begin to look for alternatives.

China and India

Since Russia launched its attack on Ukraine and Western countries became more reluctant to buy Russian oil, China and India have stepped in to fill the gap, buying up to 1 million barrels of oil per day, accounting for up to 20% of Russia’s exports. Russia.

However, the need to continue buying Russian oil at these levels is questionable, especially in China, where there are signs that the economy is slowing significantly. It also remains unclear whether one or both countries will adhere to a cap on Russian oil prices set by the West.

If Russia refuses to sell oil below the rate at which the cap is set, China and India can continue to buy its oil anyway, but will have the power to ask Russia for a significant price discount. At the same time, removing Russian oil from the wider market would raise the price of the commodity around the world, including in China and India, which also buy oil from other producers.

If Russia agrees to sell oil at the price set by the West, China and India would have no reason to pay for Russian oil above the new rate.

“I hope that China and India will see that respecting the price cap would serve their interests in lowering the price they pay for Russian oil,” Ms. Yellen said./VOA

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