Effect Russian oil price cap being capped by Western nations in an effort to reduce the revenue from fossil fuels that Moscow receives to fund its military, budget, and invasion of Ukraine.

On December 5, when the European Union will impose a boycott on the majority of Russian oil — specifically, its crude that is transported by sea — the cap is scheduled to go into force. The price ceiling was still being discussed by the EU.

As concerns about lost supply from the boycott compete with worries about weaker demand from a weakening global economy, the dual measures could have an ambiguous impact on the price of oil.

In this article, we will discuss the effect of the Russian oil price cap, ban and information on the price ceiling, the EU embargo, and what they can entail for consumers and the world economy is provided below:

HOW WOULD IT WORK AND WHAT IS THE PRICE CAP?

Together with other Group of 7 allies, U.S. Treasury Secretary Janet Yellen recommended the limitation as a strategy to keep Russian oil flowing to the world economy but limiting Russia’s earnings. 

The intention is to harm Moscow’s finances while preventing a significant increase in oil prices if Russia’s oil is abruptly removed from the world market.

Only if the price of Russian crude is at or below the cap will insurance companies and other businesses required to ship oil be able to deal with it. 

The majority of the insurers are based in the EU or the UK, and they might be obliged to take part in the cap. 

Without insurance, tanker owners could be hesitant to transport Russian oil and may encounter difficulties.

HOW WOULD OIL CONTINUE TO DRIVE THE GLOBAL ECONOMY? 

The EU and UK imposed the insurance ban in earlier rounds of sanctions, and if it were universally enforced, it could remove so much Russian crude from the market that oil prices would soar, the economies of the West would suffer, and Russia would earn more money from the oil it is still able to export in defiance of the embargo.

After Western consumers avoided it even before the EU ban, Russia, the world’s No. 2 oil supplier, has already diverted much of its supplies to India, China, and other Asian countries at discounted prices.

According to Claudio Galimberti, senior vice president of analysis at Rystad Energy, one goal of the cap is to provide a legal framework “to allow the flow of Russian oil to continue and to decrease the windfall money for Russia at the same time.”

After the EU ban takes effect, “it is crucial for the global crude markets that Russian oil still finds markets to be sold,” he continued. “If that didn’t happen, oil prices would soar worldwide.”

WHAT IMPACT WOULD VARIOUS CAP LEVELS HAVE?

Effect of the Russian oil price might be able to continue selling oil while maintaining its earnings at the current level with a cap of between USD 65 and USD 70 per barrel. 

Russian oil is currently selling for about USD 63 per barrel, which is significantly less than the global Brent average todays crude oil price is approx 77 dollars per barrel .

It would be challenging for Russia to balance its state budget at a lower cap of roughly USD 50 per barrel, as Moscow is said to need USD 60 to USD 70 per barrel to achieve its so-called “fiscal break-even.”

However, even with that USD 50 restriction, Russia’s cost of production would still be between USD 30 and USD 40 per barrel, giving Moscow an incentive to continue exporting oil just to avoid having to cap wells that can be challenging to restart.

WHAT WILL HAPPEN IF RUSSIA AND OTHER COUNTRIES DO NOT AGREE?

Effect of the Russian oil price cap has declared that it will not adhere to a cap and that it will stop supplying those that do. 

This response might be more likely to be elicited by a lower cap of about USD 50, or Russia might stop the last of its natural gas shipments to Europe.

China and India might not agree to the cap, though China may create its own insurance firms to take the place of those that the United States, the United Kingdom, and Europe have blocked.

According to Galimberti, China and India already receive discounted oil and might not want to annoy Russia.

China and India purchase Russian crude at a significant discount to Brent, so they are not necessarily dependent on a price cap to maintain their discount “said he. “By adhering to the G-7’s cap, they run the danger of alienating Russia. As a result, we do think that there would be a low level of price cap compliance.”

In order to get around the embargo, Russia may also use strategies like transferring oil from ship to ship to hide its origins.

Therefore, it is uncertain what impact the cap would have.

WHAT ABOUT THE EU EMBARGO?

The EU embargo may have its greatest effect not on December 5, when Europe finds other suppliers and Russian barrels are redirected, but on February 5, when Europe imposes an additional ban on items processed in oil refineries, such as diesel fuel.

Europe will need to rely on substitute supplies from the United States, the Middle East, and India. There will be a shortfall, which will lead to very high pricing, said Galimberti.

Many cars in Europe still operate on diesel. The additional costs will be distributed across the economy as the fuel is also used to power farm machinery and convey a wide variety of items via truck to customers.