President Joe Biden's administration is reportedly mulling scaling back its original Russian oil price cap plan, which was designed to choke off Moscow’s revenues from crude exports.
Washington and the European Union (EU) may have to settle for a more loosely enforced cap, in a higher price range than originally proposed, and with fewer participants on board, according to US media reports.
The Group of Seven (G7) nations - the United States, Japan, Germany, Britain, France, Italy and Canada - and Australia may end up being the only ones agreeing to abide by the measure fully, as investors display growing skepticism and financial market players warn of the risks the plan entails, sources were cited as saying. South Korea allegedly privately displayed willingness to go along with the price cap, with G7 officials hoping to win over countries such as New Zealand and Norway. It was acknowledged that Russia’s behemoth trading partners - India and China - would reject the price cap measure, the report said.
Challenging 'Mechanics"
As part of the sanctions policy targeting Moscow over its special military operation in Ukraine, Biden announced a ban on Russian oil, natural gas and coal imports in March. Furthermore, at their summit in June, G7 members issued a statement saying that a price cap on Russian oil could be implemented through options such as allowing the country's seaborne crude oil and petroleum products to be shipped internationally, only if they are bought at or below an agreed-upon price. However, despite months of wrangling, G7 nations have yet to determine the price cap range.
The G7 plan, spearheaded by Washington, originally envisaged a price cap in the range of $40 to $60 per barrel. However, now the higher end of that range is being mooted as more palatable, according to the cited insiders. The US shift on the Russian price cap reportedly comes as the “mechanics” of pushing through the measure are seen as increasingly challenging. Although the price cap is expected to be announced in its final form before 5 December - when EU sanctions are due to go into effect - officials involved in developing the price cap are reportedly concerned the measure might backfire, something Russia has repeatedly warned of. There are fears that a price cap could generate ever greater fluctuations in the cost of crude.
Against the backdrop of increasing prospects of a global economic recession, after spiking to more than $120 at the beginning of June, crude prices have come down to about $80 a barrel. Ahead of the 8 November mid-terms in the US, energy costs, particularly for oil and gasoline, have become an important factor in determining who will secure control of Congress, with the Democratic POTUS resorting to a spate of moves to tame spiraling prices. Besides a record release from US strategic oil reserves, Biden attempted to woo OPEC+ members to vote against a proposed production cut. His pleas fell on deaf ears and the oil-producing cartel opted for a cut of 2Mln barrels per day in early October to spur a recovery in crude prices. The Biden administration deplored the move as “shortsighted”.
The World Bank has also warned that the G7-mulled cap on the price of Russian oil was an “untested mechanism” that could have a plethora of spillover effects.
"The proposed G7 oil price cap could affect the flow of oil from Russia, but it is an untested mechanism and would need the participation of large emerging markets and developing economies to achieve its objectives," the World Bank said in a commodity markets outlook.
In response to the reported shift on the price cap range, a spokeswoman for the White House’s National Security Council, Adrienne Watson, said in a statement:
"The White House and the administration are staying the course on implementing an effective, strong price cap on Russian oil in coordination with the G7 and other partners.”
She added that it was the most effective way of ensuring that oil continues to flow into the market at lower prices.
Russia has slammed the G7's decision to introduce a price cap on Russian oil as absurd, warning that Moscow would not deliver oil products to countries that support the decision. Kremlin spokesman Dmitry Peskov emphasized that the restrictive measure would “substantially destabilize” oil markets. Peskov pointed out that the West’s “anti-Russian measures had led to a very deep [energy] crisis” in Europe, forcing Europeans to buy liquefied natural gas from the US, and resulting in a situation where “American companies are getting richer, and European taxpayers are getting poorer”. Peskov reiterated Russia’s stance that the country’s oil not delivered to Europe would be supplied to those countries that “respect market conditions”.