US in No Hurry to Cap the Price of Russian Oil
On December 5, the price cap will take effect. Penalties may apply to cargo in transit that arrives at the buyer after December 5.
In the West’s economic struggle with Russia, the Biden administration is seeking to allay industry fears of a new sanctions regime by imposing a price cap on Russian oil.
An embargo on Russian oil
From December 5, the US and its allies intend to ban companies in their countries from shipping, financing and insuring Russian oil unless the oil is sold below a set price cap, and hoped the plan would be complete a month in advance so oil markets could be prepared. Australia and other G7 democracies are coordinating the US’s strategy.
There has been a slip in the intended timing. According to the WSJ, officials don’t plan to set the cap before the November 8 midterm elections. The oil industry is wondering if Russian oil bound for December 5 will face new sanctions requirements when it reaches the buyer due to the lack of definitive details on how the restriction will work.
“From Russia, oil transportation on longer routes typically takes 45 to 60 days until December 5, about 40 days. The crude oil price is at risk as buyers offer alternative sources, so we are in a stuck freight window,” explained Kevin Book, managing director of ClearView Energy Partners.
Biden fearing supply cut by Russia
Russian officials are threatening to cut oil production in response to the price cap announcement, which could lead to volatility in the oil market. If these events occur before the election, which depends partly on oil prices, they could affect the Democrats’ position. In his campaign, President Biden repeatedly pointed out that gasoline prices had fallen in recent months from earlier this year’s record highs.
Administration officials said that getting industry feedback and negotiating prices within the Biden administration and other allied nations took longer than expected. There is still some work to be done by the countries in the G7 that want to impose sanctions.
People familiar with the matter say that efforts to set a price cap by mid-October have slowed since the Organization of Petroleum Exporting Countries and its allies announced production cuts on October 5. Before choosing a cap price, Biden administration officials wanted to assess the impact of the price cut before considering possible responses to the OPEC+ decision, the sources said.
Participants in the oil market have been consulted about this plan by the Treasury. The ministry released interim guidance on the price cap in September, saying companies would not be penalized if they accidentally financed or insured Russian oil above the cap.
In the US, the main goal of price caps is to limit Russia’s profit from oil sales while maintaining supplies on world markets. Russian officials have repeatedly threatened to halt oil exports over price restrictions, which could cause world oil prices to spike.
Other factors
When attempting to set a price at which Russian oil supplies can be capped, Biden administration officials consider several factors. These include the marginal cost of oil production in Russia and its price historically fetched in world markets. Treasury Secretary Janet Yellen said that Russian oil has historically sold for around $60 a barrel this month.
Oil analysts say that Russia’s ability to limit oil production will depend on the price set by the US and its allies. A higher price could prompt Russia to sell above the cap, while a lower price could result in Russia refusing to comply and reducing its exports.
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