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Why Putting A Price Cap On Russian Oil Won’t Work

Oil Price. com |  July 6, 2022

The oil price cap: this is the biggest energy weapon that the U.S. appears to have against Russia. First floated by Italian PM Mario Draghi earlier this year with regard to all oil producers, the idea was later taken up by Treasury Secretary Janet Yellen in discussions with the European Union on how to punish Moscow. Now, it’s been taken up by the G7. The news that the G7 is considering putting a ceiling on the price for Russian export crude garnered a lot of coverage, but there was little in the way of explaining how exactly a price cap would work. The only specific suggestion was to tie oil prices to insurance, with Russia only being able to insure its oil cargos at a price below a certain level.

The Prime Minister of Japan, Fumio Kishida, suggested this week that the cap should be placed at half the current price for Russian crude. Russian oil already sells at an often steep discount to alternatives, and a further cut in half would put the price close to the level Russia uses for its federal budget.

Talks are continuing between officials from the G7, but analysts are already weighing in, and their comments do not look particularly encouraging.

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