It is suggested that the European Union (EU) will impose a price ceiling of $65-70 per barrel on Russian oil. The G7 group, including the United States of America (US), as well as the EU and Australia, are expected to announce a price ceiling on Russian oil exported by sea on December 5, 2022, within the scope of the sanctions planned to be imposed on Moscow, while the implementation is planned to enter into force on February 5, 2023.[1]
As it is known, Western states have long sought to limit the cost of Russian oil to reduce Moscow’s revenues from energy exports. The need for such actions has been recognized in Europe before, but EU member states have yet to agree on some details, including the level of oil prices. However, in the EU, where decisions are taken unanimously, it is observed that member states have started to approach the issue of a price ceiling for Russian oil more moderately. Therefore, the EU is expected to announce its final decision on the price ceiling shortly. Thus, the Russian economy will face new sanctions.
As it is expected, the US was one of the first to discuss the issue of depriving Moscow of oil revenues. Western leaders have already discussed the possibility of setting a price cap between 40 and 60 dollars per barrel. However, it can be foreseen that the implementation of a price ceiling for Russian oil will bring along many risks. The fact that market participants stated that it is not clear how the price regulation mechanism will work supports this view.
There is already a surplus of oil in European refineries and these stocks cover the region’s needs. The reality is that many companies have bought oil early in case the EU bans fuel supplies from Russia. However, the EU has concluded several oil supply agreements with Brazil, Canada, and the US. Considering the current situation, it can be argued that Brussels will not be intimidated by warnings from the Russian authorities to refuse to sell oil to countries that have approved the specified ceiling.
Having been hit hard by the EU sanctions, it is unclear to which countries Russia will sell its oil. In this sense, it can be said that Russia’s last hope is Africa and Asia. Although African countries have low solvency, Moscow will aim to sell Russian oil to Africa at a cheaper price. In addition, China and India will also benefit from this situation. However, Indian and Chinese refineries refrain from contracting Russian oil. This is due to the uncertainty of how secondary sanctions will be applied to buyers of Russian oil above the ceiling price.
On the other hand, it is important to note that the claims that Russia, unable to sell its oil abroad, will sell it much cheaper domestically do not seem rational. This is because there are not many consumers in the domestic market that can meet the declining demand.
As a result, while the contraction in Russia’s oil trade is increasing, Moscow is facing a price ceiling that will prevent it from using its energy card as planned. This indicates that troubled times await the Moscow administration.
[1] “EU Talks Stall Over Price Level for Proposed Russian Oil Cap”, Bloomberg, https://www.bloomberg.com/news/articles/2022-11-23/eu-talks-stall-over-price-level-for-proposed-russian-oil-cap?leadSource=uverify%20wall, (Date of Accession: 22.11.2022).
