On December 5, the price cap will take effect. Penalties may apply to cargo in transit that reaches the buyer after December 5th.
In the West’s economic struggle with Russia, the Biden administration is seeking to ease industry fears of a new sanctions regime by imposing a price cap on Russian oil.
An embargo on Russian oil
Starting December 5, the United States and its allies intend to ban domestic companies from transporting, financing and insuring Russian oil unless the oil is sold below a fixed price limit, and the plan is expected to end a month earlier for the oil market. they can. be prepared. Australia and the other G7 democracies are coordinating the US strategy.
There was a slip in the intended distribution. According to the WSJ, officials do not plan to set the limit before the Nov. 8 midterm elections. The oil industry is wondering if Russian oil bound for December 5 will face new sanctions conditions when it comes to the buyer due to the lack of definitive details on how the restriction will work.
“From Russia, oil transportation on the longest routes usually takes 45 to 60 days until December 5, about 40 days. The price of crude oil is at risk because buyers offer alternative sources, so we are in a blocked freight window,” explains Kevin Book, managing director of ClearView Energy Partners.
Biden feared supply cuts by Russia
Russian officials have threatened to cut oil production in response to the price cap announcement, which could lead to volatility in the oil market. If these events occur before the election, which depends in part on the price of oil, they could affect the position of the Democrats. In his campaign, President Biden pointed out that gasoline prices have fallen in recent months from record highs earlier this year.
Administration officials said getting industry feedback and price negotiations from the Biden administration and other allied nations took longer than expected. There is still some work to be done by the countries of the G7 that want to impose sanctions.
Efforts to set a price cap by mid-October have slowed since the Organization of the Petroleum Exporting Countries and its allies announced output cuts on Oct. 5, people familiar with the matter said. Before choosing a price cap, Biden administration officials wanted to assess the impact. to cut the price before considering the possible response to the OPEC+ decision, sources said.
The participants in the oil market were consulted on this plan by the Treasury. The ministry issued interim guidance on the price cap in September, saying companies should not be penalized if they accidentally finance or insure Russian oil above the limit.
In the United States, the main purpose of the price cap is to limit Russia’s profits from oil sales while maintaining supplies on world markets. Russian officials have repeatedly threatened to stop oil exports over price restrictions, which could cause world oil prices to rise.
Other factors
In trying to set a price that could limit Russian oil supplies, Biden administration officials considered several factors. These include the marginal cost of oil production in Russia and its historically sought price in the world market. Treasury Secretary Janet Yellen said Russian oil has historically sold for around $60 a barrel this month.
Oil analysts say that Russia’s ability to limit oil production will depend on the price set by the US and its allies. A higher price could prompt Russia to sell above the limit, while a lower price could cause Russia to refuse to comply and reduce its exports.
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