- The G7’s price cap policy on Russian oil exports faces challenges as the oil market shifts.
- Ineffective enforcement undermines the impact of the price cap policy on Russian oil prices.
- New revenue streams and increased taxes limit the effectiveness of the price cap policy on Russian oil revenue.
The G7 has been implementing a price cap policy on Russian oil exports for the last six months. The policy aims to reduce Russia’s revenue and keep enough Russian oil on the market to prevent global oil prices from soaring. The policy allows G7 shipping, trading, and insurance companies to provide services for Russian oil sales without facing sanctions, but only if the oil is being sold at or below the price cap of $60 per barrel, set in December 2022.
Although the U.S. Treasury Department, which helped design the policy, recently issued a progress report concluding that the price cap is working, it may be argued that the market has undergone some significant shifts that are negating the policy’s goals with noteworthy effects on the market.
1. Price Impact
The G7 policy succeeded in lowering the price of Russian oil immediately after the invasion of Ukraine. However, between November and mid-December 2022, just before the price cap policy went into effect, the average price of Russian oil dropped from $57.49 per barrel to $48.69 per barrel. The G7 can only claim success in lowering the price of Russian oil when compared to the price immediately after the invasion and sanctions. Nonetheless, the policy failed to lower the price of Russian oil when compared to its price just before the price cap policy went into effect.
Further investigation showed that cargoes of Russian oil were regularly sold above the price cap limit, rendering the policy ineffective, and raising concerns about the lack of enforcement.
2. Sources of Russian Oil Revenue
Since the U.S. and Europe started imposing sanctions on Russian oil, Russia has built up its own shipping and insurance industry to purchase and transport its oil, enabling customers like China and India to bypass Western vessels and avoid the price cap. This new revenue stream is giving Russia an additional source of income. Furthermore, the Russian government has recently raised the taxes it charges on oil exports, increasing its earnings from oil revenue, and reducing the impact of the price cap policy on limitting russian oil revenue.
Traders should keep the following points in mind:
- The G7 believes that the price cap policy is effective; however, if that changes, they could reduce the amount of Russian oil on the market, leading to a rise in oil prices.
- If the amount of “sanctioned” oil being sold for discounted prices continues to push market prices down, OPEC may restrict the supply of oil, leading to an increase in oil prices.
- Russia may not be truthful about the amount of oil it is producing, which can also affect oil prices.
Traders are advised to exercise caution while interpreting the price cap policy’s impact on the market.
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Disclosure: The author does not own any of the securities mentioned.