The seven most advanced economies, along with the EU and Australia, decided to put a price cap on seaborne Russian crude oil. The Oil price cap is the sixth sanctions package by the West on Russia since the beginning of the war in Ukraine, which came into effect on Dec. 5, 2022. In October 2022, OPEC+ countries, in a ministerial meeting chaired by Russia and Saudi Arabia, cut oil production to stabilize the oil prices in the international oil market and put pressure on Europeans amid the energy crisis.
What is the oil price cap?
The oil price cap is a type of economic sanction through collective decision and appeal by the West to the rest of the world not to buy Russian oil above 60 dollars per barrel. The cap also stops the shipping insurance and finance for the buyer’s vessels of Russian oil. Many oil-transporter ships from developing countries get their shipping insurance from European countries and the UK. Hence, exporting oil and oil products to the rest of the world will become challenging for Russia. While the EU’s embargo on buying Russian seaborne crude oil and petroleum products remains intact, the price cap will allow European operators to transport Russian oil to developing countries as long as the price stays strictly below the ceiling.
The three objectives
According to the president of the European Commission, Ursula von der Leyen, this price cap has three objectives:
- It will strengthen the effect of previous sanctions on Russia.
- It will further diminish Russia’s revenue and its capacity to fund the war in Ukraine.
- It will stabilize global energy prices, which Russia’s war on Ukraine has inflated.
The price cap intends to cripple Russia’s economy and exert maximum pressure on Russia to end the war, causing inflation and disruption in the global supply chain.
The simple realities
Russia is the third-largest crude oil producer in the world, accounting for approximately twelve per cent of the global market. Amid a looming economic crisis, energy security has become a crucial global concern. Alternative supplies would not be able to replace Russian oil. States may face a severe energy crisis that may show its effect in the form of rising prices taking a toll on the financial apparatus of the states. The price cap is a new development in the world order where a bunch of countries have nothing to do with the buyer or the seller trying to dictate the terms of the business. International trade law based on the World Trade Organization, in general, does not allow dictating terms of trade by third parties. The price cap undermines the so-called liberal world order of free trade and market principles. It would disrupt the world supply chain and could significantly complicate the present situation in the global energy markets.
The responses
In response, Russia has drafted a presidential decree, whose details will be formulated by the Russian government, prohibiting Russian companies from selling crude oil to the member states of Price Cap Coalition as a customer. The decree is expected to restrict such sales from July 1, 2023. A long negotiation happened among European Union’s members before putting the price cap. And experts say the price cap of 60 dollars per barrel is too high and may not prove effective against Russia’s revenue collection through oil sales.
Joining the West is not a moral responsibility of India
India’s external affairs minister Dr S. Jaishankar said: “the government does not ask Indian companies to buy oil from Russia, but it is a sensible policy to get the best deal in the interest of Indian people.” India buys oil from multiple sources. Western countries are playing the moral card in India’s oil purchase from Russia, but the West’s moral argument is baseless. India’s union minister for petroleum and natural gas, Hardeep Singh Puri, has mentioned that India has no moral conflict in importing crude oil from Russia.
In FY22, India only purchased 0.2 per cent of Russia’s crude oil, which is a quarter of what Europe buys in one afternoon. Russia also does not come in India’s top four suppliers. Furthermore, international politics do not work on ethics and morality. India is morally responsible for the food and energy security of its 1.34 billion citizens, not Europe.
The EU and the US have not done much to negotiate with Russia about the Ukrainian war; instead, they have moved harshly to restrict Russia by imposing unfathomable sanctions. As the Indian Prime Minister mentioned earlier, the 21st century is an era of dialogue and diplomacy rather than war. The West should push Ukraine and Russia for dialogue-based negotiation. India is the fifth-largest economy in the world and holds strategic importance in international politics. Any dictate from Western countries may not alter India’s stand on the oil price cap. If Europeans take major action against Russia to achieve their national interests in Europe. In that case, India has the full right to secure its national interest, as Europe’s problems are not the world’s problems.
Possible Outcomes
It will be challenging for countries enforcing the price cap to track the price paid, given the opacity of the oil market. The crucial test of price cap viability will lie in enforcing the cap when breaches inevitably happen. There is uncertainty about the practical consequences of the price cap policy. Russia has already managed to increase the oil supply despite the embargo from Western countries. The sanctions have not been effective policies to force countries to behave in a certain way, and they may not work this time. If Russia managed to come up with tankers to transport the crude oil, the price cap would be of no meaning. Russia invited India to cooperate on leasing and to build large-capacity tankers and ships to avoid dependency on the ban on insurance services in the EU and Britain. India vehemently defends its oil trade with Russia. On Dec. 7, External Affairs Minister S. Jaishankar told the upper house that Indian refiners would continue to deal with the cheapest oil supplier in the market. India and China decided not to join the price cap on Russian crude oil. These two developing countries are giant consumers of oil and may not stop buying Russian crude oil.
Crude oil prices in international market oscillate between 80 to 90 dollars per barrel which is near the price cap of 60 dollars per barrel and may not effectively curb Russia’s revenue generation.
It is hard to predict the exact outcome of the price cap, but it may have two interpretations. First, if developing countries dependent on oil and gas for their significant need, such as India and China, continue to buy Russian crude oil, the effect may be limited on Russian revenue. Second, Russia is a significant contributor to the world’s energy market and putting sanctions, and price caps on Russian crude oil may lead to supply disruption of energy. If adequate oil supplies are made available at low prices in the global energy market, the oil price will stabilize, and the oil revenue of Russia may fall, which would stop the war in Ukraine. It can be done by lifting sanctions on Venezuela and Iran and may work as Europe’s alternate oil import destination.
[Photo by Acodered, via Wikimedia Commons]
The views and opinions expressed in this article are those of the author.
Anmol Kumar is a second-year master’s student of Politics and International Relations at Pondicherry University. His area of interest lies in West Asia, power politics and energy politics.
