Price cap on Russian oil wins backing of G-7 ministers

Oil pumping jack (Representative Image)

The top economic officials of the world’s leading advanced economies agreed Friday to forge ahead with a plan to form an international buyers’ cartel to cap the price of Russian oil, accelerating an ambitious effort to avoid a price shock while draining President Vladimir Putin’s war chest.

Finance ministers from the Group of 7 nations said after a virtual meeting that they were finalizing details of a price cap, which they had already agreed to explore at a formal meeting earlier this year. The plan needs to be put in place by early December, before a European Union embargo on Russian oil imports and a ban on the insurance and financing of Russian oil shipments. The Biden administration has been fearful that these moves could send energy prices skyrocketing and potentially tip the global economy into a recession.

Oil prices rose Friday, with West Texas Intermediate crude, the U.S. bench mark, gaining more than 3%, to just over $89 per barrel. Still, prices are down for the week and well off the highs of around $120 a barrel in mid-June.

In recent months, Treasury Secretary Janet Yellen and her team have been traveling the globe to solidify support for the price cap idea, an untested proposal that aims to stabilize volatile energy markets that have been roiled since Russia’s invasion of Ukraine earlier this year. A central component of those discussions has been how the price would be set and enforced.

The price cap would create an exception in European sanctions by permitting insurers to grant coverage for oil cargo only if it was being sold at or below a certain price. Britain and the European Union are global hubs for the maritime insurance industry, and bans on insuring or financing transactions involving Russian oil could cause broad disruptions to shipments of Russian oil around the world.

“We confirm our joint political intention to finalize and implement a comprehensive prohibition of services which enable maritime transportation of Russian-origin crude oil and petroleum products globally,” the finance ministers wrote in a joint statement. “The provision of such services would only be allowed if the oil and petroleum products are purchased at or below a price determined by the broad coalition of countries adhering to and implementing the price cap.”

The finance ministers have not yet agreed on the price at which Russian oil can be sold but said that it would be “set at a level based on a range of technical inputs and will be decided by the full coalition in advance of implementation in each jurisdiction.”

Yellen, in a statement Friday, said that a price cap would be a critical tool for fighting inflation and protecting Americans from future energy price spikes.

“By committing to finalize and implement a price cap, the G-7 will significantly reduce Russia’s main source of funding for its illegal war, while maintaining supplies to global energy markets by keeping Russian oil flowing at lower prices,” she said. “While we’ve seen energy prices ease in the United States, energy costs remain a concern for Americans and continue to be elevated globally.”

The proposal still faces considerable obstacles.

The European Union will have to amend a package of sanctions that is set to take effect Dec. 5 to incorporate the price cap; that will require the unanimous agreement of all 27 member states.

Biden administration officials are growing increasingly confident that they will be able to galvanize an international effort to impose the price cap, in part because of the progress at the G-7. But they say bringing all member countries of the European Union on board for the plan will be more difficult. The G-7 had already agreed to explore the concept of a price cap at a leaders’ summit in the German Alps in June. But European countries like Hungary — which previously pushed for the oil they buy from Russia via pipeline to be exempted from Europe’s import ban — have not yet agreed on such a plan.

Energy analysts have been skeptical that a price cap can corral oil prices. The maritime insurance industry, which would be responsible for making sure that buyers and sellers were honoring the price cap, has warned that insurers lack the capacity to police the transactions.

In addition, while the United States and Europe have moved to cut themselves off from Russian oil, nations such as China and India have been buying it at heavily discounted prices. That has allowed Putin to support his economy despite global sanctions that have been imposed on its central bank, financial sector and military industry.

The United States has been working to broaden the coalition beyond the Group of 7, actively courting the support of nations such as South Korea and India. Last month, Yellen’s deputy, Wally Adeyemo, met with counterparts in India to discuss global energy security and promote the price cap concept.

Biden administration officials hope that if a broad enough coalition agrees to the price cap, it would give nations that do not want to officially join more bargaining power to negotiate lower prices with Russia.
“In line with our extensive and ongoing engagement with a diverse group of countries and key stakeholders, we invite all countries to provide input on the price cap’s design and to implement this important measure,” the finance ministers wrote in Friday’s joint statement. “We seek to establish a broad coalition in order to maximize effectiveness, and urge all countries that still seek to import Russian oil and petroleum products to commit to doing so only at prices at or below the price cap.”

Enforcing the price cap will be critical to its success. The finance ministers said that they intend to use a “record-keeping and attestation model” to track whether oil transactions are below the price ceiling and that they would try to minimize the administrative burden.

It remains unclear how Russia would respond and if it would retaliate by refusing to sell its oil to drive up global prices.

Alexander Novak, Russia’s deputy prime minister, said this week that the country would not sell oil products to countries participating in the price cap, according to Russian state media.

Biden administration officials have argued that Russia is bluffing because it needs the revenue from oil sales. Allowing its oil to be shut in would also be harmful to its economy, they contend, by damaging its wells.

After surging earlier this year, oil prices have slumped in recent weeks amid increased U.S. output and concerns about a global economic slowdown.

This article originally appeared in The New York Times.

By Alan Rappeport