The US and its European allies are discussing ways to cap the price of Russian Oil between $40 and $60 a barrel in the group of seven summit runup. This is one of the ways that allies are exploring to ensure a reduction in Russian oil revenues and minimize the impact on their economies.
More About the Secondary Sanction Discussion
On June 28, the G-7 leaders agreed to explore ways to cap oil prices by banning transportation and insurance services needed to ship Russian petroleum products and crude oil unless the oil is purchased below the agreed price.
The threshold levels could change according to market conditions when the cap is agreed upon. Before the rout of crude prices on Monday, Russian oil was already trading at $80 a barrel. Since the invasion, information on Russian oil transactions has become less visible.
The selected range is believed to be Russia’s production cost and oil price before the February invasion of Ukraine. The Biden Government feels the $40 cap to be too low. The aim is to cut Russia’s revenue, but the risk of poor execution can spike the price of oil elsewhere.
So far, the US has stopped short of using secondary sanctions to enforce restrictions on Russia as such moves are viewed with concern by their allies in Europe. According to one of the people, the secondary measure alongside the capping of oil price will be the last resort.
The efforts for a price cap have intensified with US officials having a series of meetings and trying to push the sanction into reality.
While the oil caps were mentioned in the G-7 communique, there is plenty of skepticism about an agreement in the future as the idea needs to be fleshed out, as there are plenty of obstacles.
The US is worried that the EU ban, which would come to force by the end of the year, will push the oil price further up and even as high as $185 a barrel, according to several estimates, which could contribute to a potential global recession.
The EU and the UK cover the top global insurance market, and Russia will find it difficult to move its products without access to insurance services.
The EU and G-7 countries have agreed to phase out Russian oil imports. But Russia is now looking at other buyers and increasing its exports at a discounted price. Despite several countries shunning its supplies, Russia is still making $600 million a day from its oil revenue.
The latest reports show India shelling out $5.1 billion in three months ending May, more than five times the same last year’s value. On the other hand, China has doubled its spending on Russian Oil, coal, and gas for the same period.
