December 02, 2022
What Success or Failure Would Look like for the Price Cap on Russian Oil
For the policy to be judged a success, it will need to significantly cut Russia’s oil revenues. Since the beginning of the war in Ukraine, Russia has been selling its oil at big discounts—around $20 or $30 below the Brent benchmark price. At the very least, the price cap should lock in these discounts. The G7 will set the cap at a fixed price as opposed to a moving discount to Brent, but it reserves the right to alter its level at any time.
This initial price cap is just one arrow the G7 has in its quiver when it comes to depriving the Kremlin of its oil riches.
Ideally, the price cap should require Russia to sell its oil with even steeper discounts than already exist on the marketplace. The United States has said that it plans to keep the price cap above Russia’s marginal cost of production, which the Russian government assesses at roughly $40 per barrel. (Independent analysts believe Russia’s marginal cost of production may be much lower.) The closer the cap pushes the price of Russian oil to $40 per barrel or even below that threshold, the more successful it will be, as it will signal that Putin is generating minimal profits from oil sales.
At the same time, to be judged a success, the price cap must not inadvertently cause a spike in global oil prices. How might that happen? With US sanctions, overcompliance is the norm. Instead of abiding by American sanctions regulations precisely, companies often stay well clear of the line. In the case of the price cap, overcompliance would look like traders, insurers, or shipping firms refusing to deal with Russian oil even if it’s sold for a price below the cap. The result could be a major drop in the supply of Russian oil available on the global market, which could increase prices for everyone. (Of course, if the supply of Russian oil is squeezed but global energy prices do not increase, that would not be a problem from the perspective of the G7.) Fears of overcompliance explain why senior US officials have made compliance expectations relatively simple and have repeatedly downplayed the threat of American penalties when companies accidentally violate the policy.
Read the full article and more from Columbia SPIA.
More from CNAS
-
BONUS: Comparing China Sanctions Under Trump and Biden
Join Emily Kilcrease and researcher Eleanor Hume to discuss the latest edition of CNAS's Sanctions by the Numbers series, examining how the U.S.'s sanctions policy on China ha...
By Emily Kilcrease & Eleanor Hume
-
Sanctions by the Numbers: Comparing the Trump and Biden Administrations’ Sanctions and Export Controls on China
Executive Summary The Biden administration has exceeded the Trump administration in the number of financial sanctions and entity-based export controls placed on Chinese person...
By Eleanor Hume & Rowan Scarpino
-
A Fight Among China Hawks Could Imperil U.S. AI Dominance
Rolling the dice now on partnerships like the G42 deal could be critical to ensuring U.S. dominance....
By Daniel Silverberg & Elena McGovern
-
U.S. Chip Controls and the Future of AI Compute
That escalated quickly! Emily and Geoff discuss why the U.S. aim to deny China access to the computing power necessary for frontier AI capabilities has led to an ever expandin...
By Emily Kilcrease, Geoffrey Gertz & Pablo Chavez