With the deadline fast approaching, EU countries are trying in vain to agree on the precise size of a price cap for Russian oil. That maximum price must put a strong squeeze on the Kremlin’s oil revenues, and so slowly erode the war chest. But the European discord shows how much EU countries, and in the background the United States, are struggling with the increasing economic pain of the sanctions against Russia.
The price cap under discussion does not even apply to the oil that EU countries themselves buy from Russia – earlier this year the EU already reached an agreement on a total boycott of all Russian oil transported by ship. That embargo comes into effect next Monday and concerns the lion’s share of the Russian oil that goes to the EU. The EU will soon therefore hardly be buying any oil from Russia.
But to increase the impact of this sanctions package, the EU countries also decided to ban insurance for Russian oil transports by ship. On paper, this meant that almost no country in the world could buy Russian oil anymore, because almost all insurance for such shipments worldwide runs through the EU and the United Kingdom. However, the plan encountered resistance from the US, which feared shortages and high oil prices, after which a ‘trick’ was devised in the G7 context: if shipments of Russian oil take place at a price agreed in the West, they would still be allowed to be transported. insured.
But EU countries have been in conflict for months now about the height of the ceiling. The European Commission recently proposed a price ceiling of 65 dollars (62 euros) per barrel, but Poland in particular thinks that price is much too high, supported by the Baltic countries. Warsaw is demanding that the ceiling be much closer to the production cost of Russian oil, which is estimated to hover around $15 a barrel. Within the EU, Poland is often ahead of the troops when it comes to a position that is as firm as possible towards Moscow.
On the other side are EU countries with an influential shipping industry: Greece, Malta and Cyprus in particular. They fear that a price ceiling that is too low will kill their shipping companies. Other EU countries without sector interests also fear the effects that a ceiling that is too low will have on the global oil price.
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‘Doomed to fail’
According to market experts, a maximum price of 65 euros is in any case not a harsh sanction. Because at that price Russia is already selling its oil to countries such as China and India. Those countries eagerly bought up the Russian oil that European countries no longer want in recent months. They made grateful use of Russia’s poorer negotiating position – the country naturally prefers to get rid of its oil – and negotiated a hefty discount of about 30 percent. But that discount did not hurt Russia too much either. The price is still well above the price at which Russia extracts the oil from the ground, and Russia still earns several hundred million dollars on its oil every day, even at that reduced price, because it exports so much oil (about 4.5 million barrels per day).
A ceiling as proposed by Poland would have far greater consequences for the Russian treasury. Yes, there are all kinds of shortcuts through which Russia can still transport its oil to countries such as China and India once the insurance ban is in place. For example, there are also shipping companies that sail without Western insurance, the so-called ‘darkfleet‘. But even with that fleet, Russia does not have enough ships to transport all its oil. And so Russia’s oil exports will shrink, experts think, and with it revenues.
But such a low ceiling also has consequences for European countries, and no small ones. Global oil prices will skyrocket, analysts fear, and European economies cannot take that. Many EU countries are on the brink of a recession. There are few alternatives. OPEC countries such as Saudi Arabia are actually reducing production because they want higher prices.
The International Energy Agency warns that such price increases could well be the “tipping point” for an already faltering global economy.
It explains why the US is also putting pressure on Europe not to set the ceiling too low. Rising oil prices have caused political unrest in America in recent months and the White House fears the consequences of greater market fluctuations.
The EU countries already have a problem without the price cap. They still have to find alternatives to much Russian oil before the import ban takes effect on Monday. Two months ago, they had not even replaced half of them, the IEA found. The key question is therefore whether EU countries are prepared to bear the consequences of a price cap. An oil analyst from financial news agency Bloomberg thinks not. And that’s why the ceiling, according to him, is “doomed to fail”.