BRUSSELS – (AP) – The European Union has tentatively agreed to a price cap of $60 a barrel for Russian oil, a key step as Western sanctions aim to reshape the global oil market to avoid price spikes and deprive President Vladimir Putin of funding for his war in Ukraine.
After a flurry of last-minute negotiations, the EU presidency, held by the Czech Republic, said in a statement that “ambassadors have just reached an agreement on price caps for #Russian maritime oil”. The decision still needs to be formally approved through a written procedure, but is expected to be adopted.
They were to set the reduced price other nations would pay by Monday, when an EU embargo on Russian oil shipped by sea and an insurance ban on such supplies takes effect. The price cap, which was led by wealthy Group of Seven democracies and still needs their approval, aims to prevent a sudden loss of Russian oil around the world that could lead to another spike in energy prices. and further fuel inflation.
The $60 figure sets the ceiling near the current price of Russian crude, which recently fell below $60 per barrel. Some criticize this as not being low enough to cut into one of Russia’s main sources of revenue. This is still a significant discount to international benchmark Brent, which traded at around $87 a barrel on Friday, but could be high enough for Moscow to keep selling even rejecting the idea of a ceiling.
The global oil market is in serious danger of losing large quantities of crude from the world’s second largest producer. It could drive up gas prices for drivers around the world, which has sparked political turmoil for US President Joe Biden and leaders of other countries. Europe is already mired in an energy crisis, with governments facing protests over soaring costs of living, while developing countries are even more vulnerable to swings in energy costs.
But the West faces growing pressure to target one of Russia’s biggest moneymakers – oil – to cut funds flowing into Putin’s war chest and hurt Russia’s economy. as the war in Ukraine drags on into a ninth month. Oil and natural gas costs soared after demand rebounded from the pandemic, then the invasion of Ukraine destabilized energy markets, fueling Russia’s coffers.
Now more uncertainty is ahead. COVID-19 restrictions in China and a slowing global economy could mean less thirst for oil. That’s what OPEC and allied oil-producing nations, including Russia, underscored by cutting global oil supplies in October.
This competes with the EU embargo which could take more supplies out of the market, which means a shortage of oil and higher prices. Russia exports about 5 million barrels of oil per day.
Putin said he would not sell oil below a price cap and would retaliate against countries that enforce the measure. However, Russia has already redirected much of its supply to India, China and other Asian countries at reduced prices, as Western customers shunned it even before the EU embargo.
Most insurers are located in the EU or UK and may be required to participate in the cap.
Russia could also sell oil on the black market using “dark fleet” tankers to obscure owners. Oil could be transferred from ship to ship and mixed with oil of similar quality to disguise its origin.
Even then, the cap would make it “more costly, time-consuming and cumbersome” for Russia to sell oil while adhering to the restrictions, said Maria Shagina, a sanctions expert at the International Institute for Strategic Studies in Berlin.
Robin Brooks, chief economist at the Institute of International Finance in Washington, said the price cap should have been put in place as oil hovered around $120 a barrel this summer.
“Since then oil prices have obviously fallen and the global recession is a reality,” he said. “The reality is that it is unlikely to be binding given the current oil price situation.”
Others criticized the measure, the brainchild of US Treasury Secretary Janet Yellin.
Former Treasury Secretary Steve Mnuchin told CNBC during a November panel at the Milken Institute’s Middle East and Africa Summit that price caps were “not only impossible, but I think It’s the most ridiculous idea I’ve ever heard.”
Hussein reported from Washington and McHugh from Frankfurt, Germany.
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