A ‘price cap’ on Russian oil: what would that mean?

Since the US and its allies decided to stop buying Russian oil, there have been few signs that the move is causing the kind of pain that could force President Vladimir Putin to reconsider his war in Ukraine. Numerous other countries are still buying Russian crude, and a rise in prices has softened the blow from sanctions by providing Moscow with enough revenue to prevent an economic collapse.

So Putin’s opponents are considering a new idea: let Russia sell its oil so cheaply that it can no longer afford a war.

What is proposed?

The US, UK and Canada have announced a ban on Russian oil, while the European Union (EU) plans to ban Russian crude oil and fuels overseas in December early next year. In a next step, US Treasury Secretary Janet Yellen is backing a proposal to allow countries that have abstained from sanctions to continue buying oil, but cut Moscow’s profits on those sales.

How could it work?

Group of Seven (G7) countries would discuss a mechanism that could enforce only the transportation of Russian crude oil and petroleum products sold below an agreed price threshold by imposing restrictions on insurance and shipping.

About 95 percent of the world’s oil tanker fleet is covered by the International Group of Protection & Indemnity Clubs in London and some companies in mainland Europe. Western governments could try to impose a price cap by telling buyers they can continue to use that insurance, as long as they agree not to pay more than a certain price for the oil on board.

What could be the impact?

Putin says Western countries are suffering more than Russia from the economic sanctions they have imposed over its invasion of Ukraine. Rising prices of Russian commodity exports have generated excessive revenues that have helped his government weather sanctions.

Capping prices to levels closer to production costs would be a blow to Moscow’s finances, while still ensuring that energy goes where it’s needed. Since Russia is one of the world’s largest oil suppliers, a price cap could also alleviate inflationary pressures that are driving economic hardship worldwide.

What are the obstacles?

Some European officials were wary of the idea, as it would likely require the EU to reopen the legal text of its latest sanctions package.

If the allies agree on a price cap, but don’t stick to it, it would be a symbolic victory for Putin. There are plenty of ways it could fail: There’s no guarantee that Russia would agree to ship oil at capped prices, especially if the ceiling is close to production costs.

It has already shown that it is willing to withhold natural gas supplies to a number of EU countries that have refused to meet its payment requirements. The Kremlin may believe that keeping its oil off the market for a while would do more damage to the economies of Europe and North America than to its own.