Source: Shangguan News
After nearly half a year of tug-of-war, on December 4, the European Union finally announced the price ceiling for crude oil exported by sea to Russia, which was unanimously agreed by 27 member states: $60 per barrel. The move, echoed by the Group of Seven (G7) and Australia, is scheduled to take effect on December 5.
The European Union and the United States claim that this will kill two birds with one stone. It will not only greatly reduce Russia’s oil revenue, but also help stabilize global energy prices and benefit emerging economies.
However, public opinion is generally skeptical. Some US media said that Washington has gone to great lengths to promote the price limit, but it violates the laws of the market, and it is likely to be futile and become Putin’s laughing stock.
refusal or welcome
On December 2, after all-night negotiations, the EU finally reached an agreement on the price limit for seaborne oil exports to Russia. On the 4th, the EU official website issued an official announcement, which is scheduled to take effect on the 5th. The G7 and Australia have announced that they will take simultaneous action.
Specifically, the West will rely on its dominance in the field of global shipping services and impose a ban on Russian crude oil services. If the price of Russian crude oil export company exceeds US$60 per barrel, the EU, G7 and Australia will prohibit its financing, insurance, ships and shipping companies from providing any cooperation.
The West believes that this move will become a shackle of Russia’s oil revenue, will also help stabilize global energy prices, and will be beneficial to emerging economies. If Russian companies refuse to comply with the price cap, it will be difficult to find an alternative to Western ocean freight services.
In fact, since the Ukrainian crisis broke out in February, the United States and Europe have carried out multiple rounds of collective siege against Russia’s energy revenues, and the price cap is only the latest link in the chain of sanctions.
In March this year, the United States issued a decree prohibiting the import of Russian oil, natural gas and other products. Under the pressure of the United States, in June this year, the European Union adopted a sanctions plan to implement a ban on oil imports to Russia from December 5, and a ban on imports of refined petroleum products from February next year. In September this year, the G7 proposed to impose a price cap on Russian oil as an additional clause of the oil embargo.
However, since then, the United States and Europe have serious disagreements over the price limit standards, and the negotiations have been protracted. The G7 initially proposed that the price ceiling should be set at US$65-70 per barrel; Poland and the Baltic countries advocated severe sanctions, with a price limit of US$30 per barrel; however, Greece, Cyprus and Malta, which rely heavily on the shipping industry, demanded a ceiling of US$30 per barrel $70. In the end, after other member states agreed to the $60 threshold, Poland, the “nail house”, let go.
Some European observers said that this is a historic moment in the oil market and will reverse the situation in which Russia has gained huge benefits from energy trade with Europe. Russia’s oil and gas export revenue has risen by nearly 50 percent since February, the data showed.
But there are also comments that this may be a moment of compromise for Europe, and the price ceiling will open the “back door” to the Russian oil embargo.
According to the EU’s previous ban, starting from December 5, the EU will stop importing Russian seaborne crude oil, and the EU will completely ban the provision of services to Russian tankers. However, Agence France-Presse noted that the latest price cap has relaxed restrictions, allowing EU companies to provide services for Russian tankers that comply with the price cap. It can be seen that there is a subtle connection between the price ceiling and the oil ban. With the European Union no longer Rosneft’s biggest customer, the balance in the global oil market is being tipped, but the price cap provides a buffer against the imbalance.
Zhang Hong, a researcher at the Institute of Russian, Eastern European and Central Asian Studies of the Chinese Academy of Social Sciences, believes that the price cap measures are aimed at weakening Russia and suppressing international oil prices, but in general, the degree is relatively moderate and compromised, and the form is greater than the content.
In terms of price, the limit price of US$60 per barrel is similar to the list price of Urals oil, Russia’s main export oil, at the end of November, which is not a serious blow.
In terms of time, the price limit plan has been brewing for a long time, and its actual effectiveness will weaken as the cycle lengthens, and its lethality to Russia may be relatively limited.
Regarding the target of the sanctions, the price-limiting measures will not have too much impact on direct oil transactions between Russia and Europe, mainly to limit the price of third-party imports of Russian oil.
“It can be seen that it may have more diplomatic significance, which is equivalent to pulling everyone in Europe and the United States to grab Russia’s wool.” Zhang Hong said.
Sun Xia, an associate researcher at the Institute of International Studies of the Shanghai Academy of Social Sciences, pointed out that as part of the multiple rounds of sanctions imposed by Europe and the United States on Russia, the price-limiting measures have two characteristics.
One is contradictory. It has to actually hurt Russia, but also allow Russia a minimum level of profit in order to keep pumping oil out. If the scale is not right, the measure could backfire, triggering a spike in oil prices.
The second is tentative. The EU said the price cap was not set in stone and would be reviewed every two months to ensure it was at least 5 percent below the price of Russian oil.
Doubtful effect
Due to the impure motives of the West and suspicion from the outside world, the price limit may not be effective, or even self-defeating.
Based on public opinion, there are many loopholes and flaws in the price limit plan in the West, which may backfire in the end.
First, it is not driven by market supply and demand, and cannot limit the continued profitability of Russian crude oil producers.
According to estimates by the International Monetary Fund, the cost breakeven price of Russian oil production is about $30 to $40 per barrel. Russia’s Urals crude for delivery to some European regions has now traded below $60 a barrel, well below the $85 a barrel price of London-based Brent crude futures. Despite price ceilings set by the West, Russia still has room to make a profit.
Second, it is the product of a geopolitical game, and few people outside the West have responded.
According to data, in the past six months, Russia’s crude oil supply has been transferred to the Asian market on a large scale, and the market structure has undergone major changes. In October this year, Russia’s seaborne oil exports to Asia and unknown destinations soared to an average of 2.067 million barrels per day, the highest level this year. India and China have become the two major buyers of Russian crude oil.
In recent months, although the United States has repeatedly promoted the “price-limiting alliance”, India has remained indifferent. According to a poll by the Observer Research Foundation of India, 43% of Indians believe that Russia is their most reliable partner, higher than the 27% of the United States.
Third, Europe and the United States are showing signs of softening in sanctions against Russia.
A number of US media pointed out that the West is loosening the EU’s original embargo plan through price-limiting plans. The EU embargo plans to completely ban insurance and financing for Russian oil shipments. But now, the United States splits up and revokes key shipping terms, liberalizes some shipping services, and downplays comprehensive sanctions so as not to irritate Russia too much. For example, the EU proposes a 45-day transition period for the price cap; only “deliberately” transporting Russian crude oil that exceeds the price cap will be punished with a 90-day embargo.
Fourth, Russia is building alternatives to insurance and financial services.
The West is betting that without the Western shipping system, Russia’s crude oil exports will have nowhere to go. But the fact is that the marine insurance market is not completely monopolized by the United Kingdom and the United States. To break through the blockade, Russia is putting together its own independent system where buyers can arrange insurance with Russian entities, which would largely sidestep sanctions. New alternative mechanisms for international settlements are taking shape.
Another US media said that a “shadow market” is forming, and oil from Russian ports is increasingly being shipped to unknown destinations. In reality, European traders will use the ancient method of transporting oil across the sea.
Two analysts pointed out that the West is trying to deal a blow to the Russian economy through price-limiting measures, but the goals pursued are more complicated, contradictory to a certain extent, and even run counter to the laws of the market, and the effect may be relatively limited.
From the perspective of Russia, Zhang Hong pointed out that its daily output of crude oil is 10.9 million barrels, and its export scale is 2.5 million to 3 million barrels. Russia’s own sea transport capacity can only meet 15% of its export volume. Therefore, the tense economic relationship between Russia and the West will have a certain impact on Russia’s economic prosperity and damage Russia’s pricing power in the global energy price market. However, Western sanctions have also prompted Russia and other countries to actively circumvent Western shipping and insurance services, and some gray space oil export industrial chains have always existed. How much Russia might be hit remains to be seen.
Looking at the details of the price limit, Sun Xia pointed out that the set amount is very general and does not distinguish between different types of crude oil such as Ural blend crude oil and Siberian light crude oil, which have different prices. The targets of the embargo are limited, and oil traders can still circumvent the sanctions through some operations. As for the impact of price-limiting measures on international oil prices, it still depends on the next actions of Russia and other oil-producing countries.
no winner
The West is trying to “cap” Russia’s oil price by acting on its behalf. Then, how Russia will respond has aroused the attention of the outside world.
Russian energy experts said that Russia is ready to respond to Western price limits with the “Putin formula”. Putin made it clear that Russia will refuse to trade with countries that implement price-limiting mechanisms.
Some US media are also worried that Russia may restrict production and global oil prices may rise. The United States tried its best to push the price limit, but overestimated its influence on the global crude oil trade. It is likely to be in vain and become Putin’s laughing stock.
Meanwhile, OPEC+ (comprising the world‘s major oil producers) is scheduled to hold a ministerial meeting on Dec. 4 to discuss the next phase of oil production. It is reported that OPEC+ is concerned about the West’s use of political means to intervene in market prices, is weighing the potential impact, and does not rule out the possibility of further production cuts.
“Russia may push the entire OPEC + production cut to maintain international oil prices at a certain level and safeguard the overall interests of oil-producing countries.” Zhang Hong pointed out that Saudi Arabia and Russia can be said to be a community of interests. interests are also affected. Once the West institutionalizes this kind of operation that violates the laws of the market, it will seriously damage the interests of OPEC+.
“Russia will continue to shift its export destinations and refuse to export oil to countries that set price caps.” Sun Xia pointed out that the follow-up impact of Western price caps depends not only on the actions of Russia and OPEC+, but also on the economic conditions of the United States and Europe. its follow-up policy. Europe may adjust the price limit on Russia according to economic tolerance, and the United States may also release strategic oil reserves under pressure and promote the relaxation of sanctions on Venezuela.
It is worth mentioning that two analysts mentioned that the increasing Western financial sanctions against Russia will inspire more and more countries to flee the Western-dominated financial system. For example, India and other countries have proposed to settle oil trade through their own currencies. This may have an impact on the US dollar-dominated international monetary and financial system and increase the centrifugal tendency of emerging economies.
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