The countries that have imposed the cap restrict maritime shipping of Russian crude oil to third countries, leveraging their influence in maritime transport to reduce the amount that Russia can charge countries that still rely on its energy exports. Russian oil purchased above the price ceiling cannot be shipped or insured by EU and G7 operators, while transactions involving such oil also cannot be financed.
In response, Russian President Vladimir Putin on December 27 signed a decree banning supplies of Russian oil and petroleum products if contracts directly or indirectly provide for a price cap.
This development came as no surprise since Moscow had made it clear from the very beginning that it wouldn't comply with the price cap. As Russian Finance Minister Anton Siluanov had said previously, the country would look for new markets and logistics even at higher costs.
"I was not at all surprised to hear that products subject to a price cap from some buyers would not be supplied to those buyers and the seller would instead seek to find a different buyer who was prepared to deviate from the cap. That is what we would expect in a market with many buyers and many sellers," Peter Hartley, the George A. Peterkin professor of economics at Rice University, said.
He suggested that if buyers face penalties for purchasing oil above the cap, it is possible that they could get it at a discount, i.e. below the world price, and thus still profit by selling refined products at market prices. At the same time, while Russia could potentially benefit from its recent decision, it could also face negative consequences.
"If the refinery buying the Russian crude is not suited for it, and if the transportation to that refinery is much more expensive, it is possible that the ban could mean Russia ends up with a lower price than it would get by selling its crude to a usual buyer at the capped price. So, it is not all that obvious how it would go — one would need to study where Russian crude was being sold before relative to now, how the market gets re-shuffled, etc.," Hartley noted.
Meanwhile, Jacques Sapir, professor and director of studies at the Ecole des Hautes Etudes en Sciences Sociales, expressed his doubt that the caps will limit Russia's export earnings as the Russian government announced plans to cut oil production by up to 7%.
"In theory, this is sufficient to push prices well above the ceilings. Even if the EU and the United States disappear as potential customers of Russian oil and gas, the rest of the world will create demand," Sapir explained, adding that "if demand remains higher than supply, Russia will easily find new markets where it can export its hydrocarbons and the rise in prices will compensate for reduced production, implying that export revenues will remain at their second-half level."
The real question, according to the expert, is whether prices in other markets, such as India and China, would be enough to offset the drop in production.
GLOBAL MARKETS
Yet another important matter is how the price cap and Putin's decision will affect the global energy markets in general.
Hartley pointed to differences between oil refining facilities all over the globe that are tuned to refine different grades of oil, suggesting a possible reshuffling of buyers and sellers that could lead to a short-term mismatch between refineries and the oil they receive.
"This can alter the relative prices of different grades of crude and is likely, in general, to lead to a bigger gap between product prices and crude prices as the refinery sector operates less efficiently. Those price gaps then incentivize investments that will in the longer run lead to a better match of capital to its use," Hartley explained.
Ehud Ronn, professor of finance at the McCombs School of Business, University of Texas at Austin, thinks that the effect of Moscow's decision on oil prices will be minimal.
"The Russian Federation is already selling oil to several contractors – China and India, in particular – at a significant price discount. With global oil prices at the $80 range, the cap of $60 may not be significantly binding," Ronn said.
While there was a $1.60, or 1.9%, increase on December 27, the exact reason for it was unclear and the overall impact was minimal, he argued.
Moreover, as a rule, the oil market is subject to two types of crises related to supply and demand, Ronn said, adding that this year both were in play.
"A supply-side crisis began in Europe on Feb. 24th and appeared somewhat to subside (only in the oil markets) on or about June 15. The U. S. Federal Reserve Board’s increase in rates on March 16 augured a potential demand-side (recession) crisis. Excepting seven days at the end of Oct. 2022, the demand-side has had the greater impact over the latter part of 2022," Ronn said.
Sapir, for his part, warned that if countries deemed hostile by Russia suffer a major recession next year, this could create a drop in prices that will be addressed by Russia's partners, including Saudi Arabia and other OPEC countries, by cutting production in order to balance the supply/demand ratio. He suggested that oil-producing countries have amassed enough money in 2022 to be able to weather major cuts if necessary.
"In general, we see that it is not the price 'ceilings' that represent the really significant variable on the hydrocarbon markets. The two main variables, which are at the same time unknowns, are the amount of global demand for hydrocarbons (and therefore the extent of the recession to come) and the amount of global supply (in other words the impact of production cuts implemented by Russia, as well as by the OPEC countries)," Sapir concluded.
Western countries have been seeking ways to limit Russia's income from oil and gas exports, as well as their dependence on Russian fuel since the country launched a military operation in Ukraine on February 24. On December 5, the European Union placed a price cap of $60 per barrel on Russian crude oil, and was joined by the G7 nations and Australia. The EU sanctions provide for a price ceiling on Russian refined products starting from February 5, 2023.