European Union governments tentatively agreed on a $60 a barrel price cap on Russian seaborne oil, with an adjustment mechanism to keep the cap at 5% below the market price.

 

Background

  • In September 2022, members of the G7 have agreed to impose a price cap on Russian oil in a bid to hit Moscow’s ability to finance the war in Ukraine.
    • G7 is a group of the most developed and the advanced economies of the world.
    • US, UK, Canada, France, Germany, Italy and Japan are the current members of this group.
    • G7 provides a platform to discuss and coordinate solutions to major global issues, especially in the areas of trade, security, economics, and climate change.
  • The plan, however, doesn’t include Russian gas, which Europe is still quite dependent on.

 

What is the plan?

  • The introduction of a price cap on Russian oil means countries that sign up to the policy will only be permitted to purchase Russian oil and petroleum products transported via sea that are sold at or below the price cap.
  • The price cap is being designed to limit Russia from profiting from its war of aggression while limiting the impact on global energy prices.
  • The U.S. and EU officials have been trying to convince countries including India, China and Turkey to join the coalition or to at least support the price cap.
  • As per them, price cap is in the interests of all oil buyers from Russia as it will give them leverage to lower purchase prices.

 

How will it be enforced?

  • For countries that join the coalition, it would mean simply not buying Russian oil unless the price is reduced to where the cap is determined.
    • In other words, buyers could continue to buy Russian crude provided that they pay less than the agreed-upon maximum price.
  • For countries that don’t join the coalition, or buy oil higher than the cap price, they would lose access to all services provided by the coalition countries.
    • Services provided by the coalition countries include: insurance, currency payment, facilitation and vessel clearances for their shipments.
    • Eg. – London is a major global centre for maritime insurance.
  • G7 countries say they are aiming to reduce the price of oil, but not the quantity of oil that Russia sells, so as to control inflation globally while hurting the Russian economy.
  • This could only work, of course, if all countries joined the coalition.

 

India’s response

  • India’s oil intake from Russia, which was minuscule prior to the war, has soared 50 times over.
  • Indian government’s stand is believed to be driven by its national interest which, at this moment, is to provide affordable oil to Indian consumers.
    • India has made it clear that it will examine the prospect of a price cap on Russian oil and will respond according to its supreme national interest.
  • Experts believe that India might not abide by the price cap as it is receiving oil at discounted price from Russia.