The Biden administration hopes to implement the first phase of a price cap on Russian oil exports this fall in coordination with the G7, with an eye toward bringing in additional Asian partners in the winter.
“We’re trying to avoid a spike in global energy prices by avoiding a situation where production from Russia just stops and you see a subsequent spike in price,” Treasury Under Secretary for Economic Policy told Yahoo Finance. , BenHarris.
The United States has been in detailed talks with G7 partners about setting a price cap in an effort to reduce Russia’s revenue to fight Ukraine and ensure oil can keep flowing to the world market, preventing a spike in world oil prices and potentially keeping a check on inflation. At home and abroad.
Barclays estimates that if most of Russia’s seaborne exports are disrupted, oil prices could rise to $200 a barrel.
In recent weeks, the price of oil has fallen sharply, falling from over $120 a barrel earlier this year to under $88 on Tuesday morning. Meanwhile, retail gasoline prices have fallen more than 20%, from more than $5 a gallon nationally in mid-June to $3.95 a gallon as of Monday. based on AAA data.
Data released last week showed consumer prices were flat from June to July, with energy prices falling 7.7% month-on-month. Annually, consumer prices in July were 8.5% higher than the previous year period.
The proposed price cap would come alongside Europe’s sixth sanctions package, which would impose an outright ban on European imports of Russian oil. This package will also impose a ban on financial services for countries importing all Russian crude oil and all Russian refined products shipped by sea.
Britain is expected to join the EU in banning insurance and reinsurance on ships carrying Russian oil. The ships Russia uses to export its oil are often owned by Western companies, while the trade financing that many importers around the world use to import Russian oil is done through Western banks.
Banning Russian oil and necessary transportation services would essentially prevent Russia from exporting much of its oil, potentially shutting down a large amount of Russian production and creating a potentially dramatic increase in the world oil price.
“This is unprecedented,” Harris said. “But I think most analysts agree that if a large part of Russian production were to be shut down, you would see a similar increase in the world price of oil.”
‘Our incentives are aligned’
Historically, the United States has moved in tandem with the European Union when implementing sanctions. Before implementing the price cap, the US will adopt complementary sanctions this fall before December 5, when the sixth G7 sanctions package against Russia takes effect.
A Treasury official says a price cap keeps EU sanctions in place but allows countries to use Western services needed to trade if the price of oil falls below a certain level, keeping Russian oil flowing. in the market. Treasury officials see the price cap as a kind of safety valve for the sixth package of sanctions, which otherwise prohibits global trade in Russian oil using European or British services.
Without a price cap, after Europe’s sixth sanctions package is implemented, anyone trading Russian oil would be in violation of European sanctions, regardless of price.
While discussions within the G7 are in the final stages of execution, talks with Asia are in early innings with the US holding briefings and educational sessions with Asian countries, outlining the goals of the price cap, how it might function and listening. to your concerns.
A Treasury official tells Yahoo Finance that the administration is not yet at the negotiating level, but Asian officials have been eager to understand the US objective with a price cap.
Treasury officials explained that a price cap would benefit China and India, which have an economic incentive to import oil as cheaply as possible. As one Treasury official put it: “This is a case where our incentives are aligned.”
The administration also believes that a Russian oil export price cap will be in the interest of Asian countries, as the G7 has great influence over oil trade given that most of the oil traded takes place in Western ships. under western finance and insurance. If countries want to buy Russian oil, they typically require Western financing to do so, and to obtain it they would have to meet the oil price cap, according to the Treasury.
“It really is in everyone’s interest except Russia to have a price cap and to have the opportunity to buy cheap oil. Not only for the major G7 countries, but also for the lower income countries that have suffered from higher energy prices,” said Harris. “This is a real opportunity to provide them with some price stability as well.”