G7 work on price cap for Russian oil

Created: 06/28/2022, 16:06

At the end of the G7 summit, the focus was on the new world order after the Russian attack on Ukraine and on the topic of digitization.

© Michael Kappeler/dpa

Despite sanctions, Russia earns billions from oil exports.

At the same time, consumers in the USA and Europe have to accept sharp jumps in the price of petrol and heating oil.

The G7 countries now want to act.

Elmau - Can the oil price rally triggered by the Ukraine war be stopped?

In view of the anger of hundreds of millions of people about high fuel prices, this was one of the central questions at the G7 summit in Elmau.

The USA brought a delicate proposal that is now to be pursued - even if Chancellor Olaf Scholz (SPD) was not exactly euphoric about it at the end of the meeting.

Questions and answers at a glance:

Why is?

The G7 want to work on a plan for an international price cap for Russian oil.

It envisages forcing Russia to sell oil to large buyers such as India at a significantly lower price in the future.

The hope is that this will ease the markets.

In addition, it should be ensured that Russia no longer benefits from rising oil prices and can thus fill its war chest.

Didn't the EU just decide on an oil embargo against Russia?

Yes, but this could end up causing world prices to keep rising due to increasing demand for non-Russian oil - which would be good for Russian President Vladimir Putin and bad for consumers and the economy in any country that needs to import oil.

In the G7 countries it is therefore currently considered better if third countries continue to purchase Russian oil.

But this should be kept artificially cheap.

How could Russia be forced to sell its oil cheaper to countries like India?

The idea is to link important services for oil transport to compliance with the price cap.

For example, it could be decided that western insurance services for shipments of Russian oil would not be subject to sanctions regimes if the price cap is respected.

There could be similar regulations for shipping companies that provide ships for the transport of Russian oil.

Are there no alternatives to western services?

Yes, but the capacities are not sufficient according to the price cap planners.

For example, a large part of all ship transport is insured via the insurance marketplace Lloyd's of London, and German companies play a major role in reinsurance.

Many oil transporters belong to shipping companies from EU countries such as Greece, Belgium or Malta.

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Why is insurance needed at all?

These insurance services are important because oil tankers are generally not allowed to sail uninsured through the sovereign waters of states.

This requirement is intended to ensure that compensation can be paid in the event of an average or an environmental disaster.

How much revenue could Russia lose?

Most recently, a barrel (159 liters) of Russian Urals oil cost around 100 US dollars.

With an estimated production cost of around $20 and a price cap of, say, $60, Russia would then lose half of its profit per barrel.

At the same time, states that no longer want to buy oil from Russia at all can hope that the situation on the markets will ease somewhat.

What effects would the price cap have on prices in Germany and the other G7 countries?

Ideally, oil prices would fall; in the less favorable case, at least they would not rise any further.

However, precise forecasts are difficult to make.

The petroleum trade association Fuels und Energie already explained in the discussion about the EU oil embargo that market and price developments depend on many factors, including the dollar exchange rate and decisions by the major producing countries.

What price cap should there be?

The planners have been silent about this so far.

According to a senior EU official, there could be flexible pricing.

The price is a key question, he said on Tuesday.

if you go too high, the revenue for Russia is too high.

Setting the price too low could discourage Russia from continuing to supply oil.

When could there be a decision on the price cap?

That is unclear.

Chancellor Olaf Scholz described the plans in the final press conference as a "very ambitious and very demanding project".

So there will still be a lot of work involved.

From the point of view of negotiators, the technical preparations could be completed shortly.

It is now important to persuade a sufficient number of states and also insurers to participate, according to a summit delegation.

The upper price limit will not work if Western insurers no longer want to insure Russian oil transports or if third countries do not dare to buy cheap Russian oil for fear of Russia.

Could there also be a price cap for Russian gas?

That should also be checked.

But it is questionable whether Russia would still deliver gas to Europe if it received significantly less money for it.

Alternatively, there could also be a price cap in which the EU states pay the difference to relieve consumers.

dpa