Mon. Jan 30th, 2023

Prof. ST Hsieh

Director, US-China Energy Industry Forum

626-376-7460

Shsieh[email protected]

November 30, 2022

European Price Cap on Russian oil was proposed in March of 2022, right after the broke out of the Ukraine war. It will be enforced on December 5, 2022, only five days away.

The fact that Europeans still could not agree on a price to cap indicated that it was possible Europeans were not serious about the price cap to begin with in March. They might not have expected that the Ukraine war should be concluded quickly. It is also clear that Europeans never had any exit strategy for ending the war.

The task of price cap gets more and more challenging as the war drags on. Initially, when the embargo was announced in March, it was meant to punish Russia with less revenue from exporting oil to Europe. Unfortunately, the price cap strategy now is mainly for reducing European’s skyrocketing energy costs. This the main reason why, nations such as Poland are insisting on the US$30 per barrel.

Zelenskyy’s demand of a price cap on US$30 per barrel in order to punish Russia is baseless. He is not even at the bargain table: Ukraine under Zelenskyy is war torn and completely depends on foreign aids. He is not paying any bills!

Price cap is an anti-market or free trade system move; it may not work at all. Specifically, the crude oil market has been globalized, there are major suppliers and cartels who can influence global oil prices by adjusting outputs instantly. The global oil price is not static. The matter of fact is that Europeans depend on energy imports including crude oil and refined products. However, major economies that also depend on crude oil imports such as China, which purchases Russian oil. Global crude oil prices also respond to China’s economy strength.

The nightmare scenario is that price cap, as government intervention, is an assault to the existing global oil market system. If it works, the strategy could be duplicated by anyone at any time, there would be no more free oil market.

Russian oil is still flowing in huge volumes even as EU sanctions and a price cap are less than a week away.

Phil Rosen Wed, November 30, 2022 at 3:30 AM

European governments still can’t agree on a price cap for Russian oil even as the December 5 deadline is less than a week away. Nations were supposed to announce their decision last week, but so far have remained mum on the matter.

There’s a divide on how low to set the cap. A higher price ceiling would minimize damage to European energy flows, but a lower cap would mean more pain for Moscow’s export revenues.

Poland, for example, is committed to a $30 price cap.

“The Poles are completely uncompromising on the price, without suggesting an acceptable alternative,” one EU diplomat said, according to a Reuters report. “Clearly there is growing annoyance with the Polish position.”

Ukrainian President Volodymyr Zelenskyy, too, has insisted on a cap as low as $30. He said last week that a limit being considered as high as $70 was a “concession” to Moscow.

Even with a price cap of, say, $65, it’s unclear whether that can really make an impact, given that Russia’s flagship crude oil — Urals grade crude — is trading 20% below that level already.

Either way, as European nations debate the particulars, the EU is still scheduled to begin an embargo on Russian seaborne crude starting December 5.

And yet, Russia remains on track this month to ship its highest amount of oil products since launching its war on Ukraine earlier this year.

Despite the West’s repeated condemnation of Russia and President Vladimir Putin, Russia remains Europe’s largest single refined oil products supplier.

U.S. urges caution on low-quoted Russian oil prices as EU debates price cap

By David Lawder, November 30, 2022

NEW YORK (Reuters) – The Biden administration broke its silence on Wednesday on European Union deliberations over a $65-70 per barrel Russian oil price cap on Wednesday, warning far-lower prices cited for some Russian Urals crude shipments should be approached with caution.

A U.S. official cited outside estimates showing that over the last two months, the Urals discount to benchmark Brent crude has recently been close to $23 a barrel, falling as low as $17 a barrel. With Brent trading at $85.36 a barrel on Wednesday, a $23 discount implies a Urals price of around $62, much closer to the proposed cap level.

But the U.S. official’s comments, which signal growing concern over the EU deliberations, come just five days before a European Union embargo on Russian crude imports is set to be phased in.

The U.S. official said such prices do not include transportation and other costs associated with Russian crudes. A price cap of $65 a barrel on Russian crude would represent a meaningful price reduction from recent prices, citing an estimated average of $78 per barrel since March 2022.

The cap was conceived as a way to limit Moscow’s oil revenues while keeping Russian crude on the global market to avoid a massive spike in oil prices.

Russia said last week it would not supply oil and gas to countries supporting the cap, but will make a final decision once it analyses final figures.

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