The European Union agrees to limit Russian oil to $60 a barrel

The European Union on Friday reached an agreement on a price cap of $60 a barrel for Russian oil, an important move as Western sanctions aim to reorganize the global oil market to prevent price spikes and President Vladimir Putin’s funding cuts to starve out of his war in Ukraine.

After a flurry of last-minute negotiations, the EU Council Presidency, held by the Czech Republic, tweeted that “Ambassadors have just reached an agreement on the price cap for Russian sea oil”. The decision still has to be officially approved in a written procedure, but is expected to go through.

Europe had to agree on the reduced price that other nations will pay by Monday, when an EU embargo on Russian oil transported by sea and an insurance ban on those shipments come into effect. The price cap, which has been spearheaded by the Group of Seven Wealthy Democracies and still awaits their approval, aims to prevent a sudden loss of Russian oil to the world, which could lead to a new spike in energy prices and further inflation.

Poland has long held back an agreement to keep the cap as low as possible. After more than 24 hours of deliberations, when other EU countries had signaled that they would support the agreement, Warsaw finally gave in late Friday.

“Crippling Russia’s energy revenues is key to stopping Russia’s war machine,” said Estonian Prime Minister Kaja Kallas, adding that she was glad the cap was cut a few extra dollars from previous proposals. She said that every dollar the cap was reduced added $2 billion less to Russia’s war chest.

“It’s no secret that we wanted the price to be lower,” added Kallas, highlighting the differences within the EU. “A price of between $30 and $40 would seriously harm Russia. However, this is the best compromise we could find.”

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Cap similar to market price

The $60 figure sets the cap near the current price of Russian crude oil, which recently fell below $60 a barrel. Some criticize that this is not low enough to cut one of Russia’s main sources of income. It’s still a big discount to international benchmark Brent, which fell to $85.48 a barrel on Friday but could be high enough for Moscow to keep selling even if it dismisses the idea of ​​a cap.

The global oil market is at great risk of losing large amounts of crude oil from the world’s second largest producer. It could drive up gasoline prices for motorists worldwide, which has caused political turmoil among US President Joe Biden and leaders in other nations. Europe is already mired in an energy crisis, while governments face protests over rising living costs, while developing countries are even more vulnerable to shifts in energy costs.

But the West is facing mounting pressure to target one of Russia’s main moneymakers – oil – in a bid to slash funds going into Putin’s war chest and hurt Russia’s economy as the war in Ukraine enters a ninth month goes. Oil and natural gas costs skyrocketed after demand recovered from the pandemic and then the invasion of Ukraine’s energy markets unsettled energy markets and fed Russia’s coffers.

US National Security Council spokesman John Kirby told reporters on Friday that “the cap itself will have the desired effect, limiting Putin’s ability to profit from oil sales and limiting his ability to continue using that money to fund his… to use war machines.”

He praised the EU’s consensus, saying the $60 a barrel cap was “reasonable”.

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Putin promised retaliation

However, more uncertainty lies ahead. COVID-19 restrictions in China and a slowing global economy could result in less thirst for oil. This was pointed out by OPEC and allied oil-producing countries, including Russia, in October when they cut supplies to the world. The OPEC+ alliance is scheduled to meet again on Sunday.

OPEC’s move competes with the EU embargo, which could take more oil supplies off the market, raising fears of a supply shortage and higher prices. Russia exports around 5 million barrels of oil every day.

Putin said he will not sell oil below a price cap and will retaliate against nations that implement the measure. However, Russia has already rerouted much of its shipments to India, China and other Asian countries at discounted rates because Western customers avoided doing so even before the EU embargo.

Most insurers are based in the EU or the UK and could be required to participate in the price cap.

Russia could also sell oil off the books by using “dark fleet” tankers with obscure ownership. Oil could be transferred from one ship to another and mixed with oil of a similar quality to disguise its origin.

Even under these circumstances, the cap would make it “more costly, time-consuming and cumbersome” for Russia to sell oil around 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 introduced when oil prices were hovering around $120 a barrel this summer.

“Since then, oil prices have obviously fallen and the global recession is a real thing,” he said. “The reality is that given current oil prices, it probably isn’t binding.”

European leaders praised their work on the price cap, an idea of ​​US Treasury Secretary Janet Yellen.

“The EU agreement on an oil price cap, agreed with G7 and others, will significantly reduce Russia’s revenues,” said Ursula von der Leyen, President of the European Commission, the EU’s executive branch. “It will help us stabilize global energy prices, which will benefit emerging markets around the world.”

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