European price caps on Russian energy exports: What it could mean for consumers

Market


NEW DELHI: Members of the G7, in a meeting last week, agreed to impose a price cap on Russian oil to hit Moscow’s ability to finance the war in Ukraine. Finance ministers of the G7 countries–UK, US, Canada, France, Germany, Italy and Japan–said the cap on crude oil and petroleum products would also help reduce global energy prices.

As expected, Kremlin’s reaction was anything but favourable. Russia said it would stop selling oil to countries that imposed price caps.

Undeterred, European Commission President Ursula von der Leyen said on Wednesday said that European Union countries should set a price cap on Russian natural gas and seek a “solidarity contribution” from European oil and gas companies making extraordinary profits as the war in Ukraine drives up energy costs, according to agency reports.

This has only added fuel to the fire, and pushed crude oil prices higher. Global oil prices surged nearly $1 a on barrel Thursday as an energy standoff between Europe and Russia triggered supply concerns.

What is the proposed price cap and how would it work?

A price cap on Russian energy will primarily look to limit the price countries pay for energy imports at a level that is below current high prices but enough to incentivise continuing exports. The move is intended to curb Russian energy revenues that Moscow relies on to fund its ongoing war in Ukraine. The exact price, the G7 leaders have said, will be fixed “at a level based on a range of technical inputs.”

There is another element. On 5 December 2022, the European Union (EU) will ban seaborne imports of Russian oil which will be followed by a ban on refined oil products in early 2023. The EU and the UK, which dominate the maritime shipping and insurance market, may provide these services only to those suppliers who abide by the price cap. This would ensure that supplies of Russian energy would continue but on Europe’s terms and prices.

Will it work?

The jury is out. The G7 is making a risky bet. They believe that Russia will buckle under the pressure and continue oil supplies to Europe. Proponents of the price cap say that bringing together the financial heft of the US and Europe’s dominance in shipping insurance will force Russia to accept terms or search for less-profitable and riskier supply routes and customers in Asia.

As US Treasury Secretary Janet Yellen put it, “Why should they retaliate for an initiative that enables their oil to continue to flow through to world markets at a price that is still profitable?”

Russia hasn’t proved as reasonable as Europe and the US would like.

In the aftermath of the G7 finance ministers meeting where the price cap was discussed, Moscow announced that the Nord Stream 1 pipeline, which was the main artery for Europe’s natural gas imports from Russia, would be closed indefinitely.

Experts say European plans may need the support of India and China to succeed. This is unlikely to come through as both countries have benefited significantly from deeply discounted imports of Russian oil.

What are the challenges?

For one, Russia could simply call Europe’s bluff and refuse to sell. Moscow’s reaction to news of the oil cap was clear: it would stop selling oil to countries that set caps on Russian oil.

Russia has shown a penchant for this in the past. It cut supplies to countries that refused to pay for energy supplies in rubles and, as mentioned previously, shut off the Nord Stream 1 pipeline. In response, prices of natural gas on European markets shot sharply upwards on Monday.

With energy prices soaring and Europe staring down the barrel of a cost of living crisis, a bruising showdown with Moscow over oil prices may push domestic populations to the breaking point. Numerous analysts have warned of skyrocketing oil prices as the inevitable consequence of further tensions and uncertainty in energy markets.

What role is India expected to play?

It is clear that Europe would like India’s support in enforcing this price cap. European Energy Commission Kadri Simson argued that India and China should help with this matter.

China and India have increased their purchases of Russian oil following Moscow’s invasion of Ukraine, benefiting from discounted rates.

When asked whether the EU expects China and India to help with the proposed price cap, Simson said, “I think that they should.” Speaking of India and China, Simpson said that it was “unfair to pay excess revenues to Russia” even as both countries were claiming “that this is important for their security of supply.”

When asked about India’s position on price caps on Russian oil imports, petroleum minister Hardeep Puri said that India would “look at it very carefully”. However, Puri also rejected a moral duty to sanction Russia because of its actions in Ukraine, saying “I have a moral duty to my consumers.”

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