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The leaders of the Group of 7 are ready to celebrate the results of the new efforts to stabilize the world oil markets and punish Moscow.
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(Video) Putting a Price Cap on Russian Oil
Sjim tankersley
Jim Tankersley is a financial reporter covering the White House. He follows the Biden administration's efforts to cut Russia's oil revenues over the past year.
In early June, at the behest of the Biden administration, German leaders brought together the top economic officials of the Group of 7 for a teleconference with the goal of dealing a significant economic blow to Russia.
Last year, in a series of one-off talks, Americans tried to hear from their colleagues in Europe, Canada and Japan about an unusual and unproven idea. Administration officials wanted to try to limit the price Moscow could set for each barrel of oil it sold on the world market. Treasury Secretary Janet L. Yellen unveiled the plan a few weeks earlier at a meeting of finance ministers in Bonn, Germany.
The reception was mixed, partly because other countries were unsure how serious the administration would continue. But the call in early June left no doubt: US officials said they were committed to capping oil prices and invited everyone else to join them. At the end of the month, the leaders of Group 7the undersignedin concept.
AsA group of 7 people prepares to meet againthis week in Hiroshima, Japan, official and market figures suggest the untested concept has helped meet twin initial price cap targetsentered into force in december. The cap appears to force Russia to sell its oil at a lower price than other major producers when crude prices have plummeted from levels just after Russia's invasion of Ukraine.
Data from Russia and international organizations show Moscow's revenues have fallen, forcing fiscal decisions that administration officials say could begin to hamper its war effort. Drivers in the United States and elsewhere are paying far less at the pump than some analysts feared.
From Russiaoil revenuethey fell 43% in March compared to a year earlier, the International Energy Agency said last month, though the overall volume of their export sales rose. This week,announced the agencythat Russian revenues have recovered somewhat, but are still 27 percent lower than the previous year. State tax revenue from the oil and gas sector fell by almost two-thirds compared to the previous year.
Russian officials have been forced to change the way they tax oil production in an apparent attempt to recoup some of the lost revenue. They also appear to be spending government money to start building their own network of ships, insurance companies and other essentials of the oil trade, an effort that European and US officials say is a clear sign of success.
"The Russian price cap is working and working extremely well," Wally Adeyemo, deputy finance minister, said in an interview. “The money they spend building this ecosystem to support their energy trade is money they can't spend building missiles or buying tanks. And what we're going to continue to do is force Russia to make those tough decisions."
Some analysts doubt the plan is working as well as administration officials claim, at least in terms of revenue. They say the price data Russia receives for its exported oil is unreliable. And they say other evidence, such as Indian customs reports, suggests Russian officials may be using sophisticated fraud to bypass the cap and sell crude at prices well above the cap.
"I'm concerned that the Biden administration's desperation to claim victory with price caps is preventing them from really recognizing what's not working and taking steps that could really help them win," said Steve Cicala, an energy economist at Tufts University. .he wroteabout possible tax evasion under the hood.
The price cap was designed as an escape route from the economic sanctions that the United States, Europe and others announced on Russian oil exports immediately after the invasion. Those sanctions included bans preventing wealthy democracies from buying Russian oil on the world market. But at the start of the war, they essentially failed. They raised the price of all the oil in the world, no matter where it was produced. Higher prices brought record export earnings in Moscow, whilerising gasoline prices in the USabove $5 a gallon and is helping lower President Biden's approval rating.
A new round of European sanctions was supposed to hit Russian oil hard in December. Economists on Wall Street and in the Biden administration have warned that these sanctions could drive oil out of the market and cause prices to rise again. So administration officials decided to try to take advantage of the West's dominance of the oil trade, including how it is transported and financed, and force Russia into a firm deal.
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According to the planRussia could continue to sell oil, but if it wanted access to Western naval infrastructure, it had to sell at a deep discount. In December, European leaders agreed to set the ceiling at $60 a barrel. Other limits followed for different types of petroleum products, such as diesel.
Many analysts were skeptical that it could succeed. The cap, which was too punitive, had the potential to prompt Russia to severely limit the amount of oil it extracts and sells. Such a move could lead to an increase in crude oil prices. Alternatively, a cap that is too lenient might not affect Russian oil sales and revenue at all.
No scenario happened. Russia announced a modest production cut this spring, but has largely continued to produce at roughly the same levels as when the war began.
Fatih Birol, executive director of the International Energy Agency, called the price cap an important "safety valve" and a critical policy that forced Russia to sell oil well below international benchmark prices. Russian oil is now trading between $25 and $35 a barrel less than other oil on the world market, according to Finance Ministry officials.
"Russia played the energy card and didn't win", Mr. Birolwrote in the February report. "Given that energy is the backbone of the Russian economy, it is not surprising that its difficulties in this area are leading to broader problems. Its budget deficit is growing as military spending and population subsidies far outstrip revenues. for exports”.
Biden administration officials say there is no evidence of widespread Russian tax evasion and that Mr. Chikala's analysis of Indian customs reports does not take into account the rising costs of transporting Russian oil to India , which are integrated into the customs data. A White House official told reporters traveling with Biden in Hiroshima on Thursday that the Group of 7 leaders would take further steps to address price cap evasion at a meeting this weekend.
There is no question that the world avoided what was personally the biggest concern of Biden officials last summer: another skyrocketing oil price.
American drivers paid an average of about $3.54 for a gallon of gas on Monday. That was nearly $1 more than a year ago and nowhere near the $7 a gallon some administration officials had feared if the cap failed to prevent a second oil spike triggered by a Russian invasion. Gasoline prices are a small source of relief for Mr. Biden, as high inflation continues to hamper his electoral support.
After a spike in the months after the Russian invasion, global oil prices fell again in late 2021. The drop was partly due to a worldwide economic chill and continued even after major producers, like Saudi Arabia, will cut production.
Falling world prices contributed to Russia's income decline, but that's not the whole story. Reported sales prices for Russian crude exports, known as Urals, have fallen by more than double the world price of Brent crude.
The Group of 7 leaders meeting in Japan this week are unlikely to spend much time on the cap, instead focusing on other joint efforts to rein in Russia's economy and income. And the biggest winners of the cap decision won't be on top.
"The immediate beneficiaries are mainly developing markets and low-income countries that import oil from Russia," Finance Ministry officials said in a recent report.
The officials cited several countries outside the Group of 7, notably India and China, that used the ceiling as leverage to pay discounts on Russian oil. Neither India nor China have joined the official effort to rein in, but oil consumers are the ones seeing lower prices as a result.
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FAQs
What is the impact of price cap on Russian oil? ›
The price cap mechanism is intended to restrain Russian oil revenues by capping the price, while still allowing the supply of Russian oil to the global market, thereby avoiding spikes in international oil prices.
What percentage of Russia's revenue comes from oil and gas? ›Oil and gas sector as a share of GDP in Russia quarterly 2017-2022. Russia's oil and gas industry accounted for around 15 percent of the country's gross domestic product (GDP) between October and December 2022.
How much did oil rise after Russia says it could cut output due to price cap? ›Oil prices posts gains after Russia says it will cut output by 500,000 barrels a day. Russia will cut oil output by 500,000 barrels per day in March, Deputy Prime Minister Alexander Novak said on Friday.
How much money did Russia make from oil? ›Moscow's exports of crude oil and oil products rose in March to their highest level since April 2020, jumping by 600,000 barrels a day, the International Energy Agency (IEA) said in its monthly oil report Friday. The rise lifted Russia's estimated revenue from oil exports to $12.7 billion last month.
What would happen if EU can t agree on Russian oil price cap? ›If there was no agreement on the G7 price cap idea by next Monday, the EU would implement harsher measures agreed at the end of May - a ban on all Russian crude oil imports from Dec. 5 and on petroleum products from Feb. 5, Polish diplomats said.
How effectively can Russia bypass the G7's new oil price cap? ›If the G7 decided to toughen up its sanctions against Russian oil exports, then Moscow and Tehran could agree to a swap deal of one sort or another that would see Russian oil go to anywhere that Iran needed it, with a compensatory amount of 'Iraqi' (read 'Iranian') oil going to wherever Russia wanted, as Iraq oil is ...
Is Russia still making money on oil? ›Before the war, oil revenues constituted 30–35 percent of the total Russian budget. In 2023, oil revenues have fallen to just 23 percent of the Russian budget. This decline in revenue has occurred despite Russia's exporting roughly 5 to 10 percent more crude oil in April 2023 compared to March 2022.
Who has the most oil in the world? ›- Countries That Have The Largest Oil Reserves In The World. ...
- Venezuela - 303.806 Billion Barrels. ...
- Saudi Arabia - 258.600 Billion Barrels. ...
- Iran - 208.600 Billion Barrels. ...
- Canada - 170.300 Billion Barrels. ...
- Iraq - 145.019 Billion Barrels. ...
- Kuwait - 101.500 Billion Barrels.
Russia's revenue from exports of fossil fuels reached roughly 701 million euros daily in December 2022, down 6.7 percent from the previous month. The most exported commodity was crude oil, accounting for 51 percent of the total value, or 361.2 million euros per day.
Why are gas prices going up if we don t use Russian oil? ›States Oil Production
And as we know from Econ 101, when there's less supply of an item in demand, prices rise. For example, if Europe buys less Russian oil, it will have to replace it with oil from somewhere else — perhaps from the powerful Saudi Arabia-led Organization of the Petroleum Exporting Countries.
Did the Great Depression caused the price of oil to increase? ›
The new supply of oil caused the price of oil to fall. A barrel of oil dropped from nearly $1 to just 46 cents.
What has the largest impact on the price of oil? ›The two primary factors that impact the price of oil are: Supply and demand. Cost of production.
Who buys the most oil from Russia? ›Behind China and India, Turkey and Bulgaria are the biggest buyers of Russian crude. Even before Vladimir Putin launched his war on Ukraine, China was already a top buyer of Russian crude, importing 25% of its crude from the country in 2021.
Who bought the most oil from Russia? ›As one might expect, China has been the top buyer of Russian fossil fuels since the start of the invasion. Russia's neighbor and informal ally has primarily imported crude oil, which has made up more than 80% of its imports totaling more than $55 billion since the start of the invasion.
Who is buying Russian oil 2023? ›As of January 14, 2023, the largest volume of Russian crude oil shipments went to China, at 55.2 million metric tons per day based on a 30-day running average. Since the beginning of 2022, the shipments to the European Union (EU) and the United States have decreased significantly.
Can EU survive without Russian gas and oil? ›"In 2023, Europe will likely, for the first time, need to survive a full calendar year with only minimal volumes of Russian pipeline gas," S&P Global analysts Michael Stoppard and Alun Davies said in a recent report.
What will happen if Russian oil is banned? ›The oil import ban is likely to result in an increase in these exports, even if Russia's revenues fall overall as a result of the ban. This is why a strong price cap is needed. The essential next steps are: The most important way to cut Russia's export revenues further will be to gradually drive down the oil price cap.
Can Europe replace Russian gas with oil? ›New research released by the International Oil & Gas Producers (IOGP) Europe and the American Petroleum Institute (API) shows Europe can progressively rebalance its gas supply and replace Russian gas imports well before 2030, despite short term challenges and significant impact to society.
Who imports less than 1% of oil from Russia? ›From a market share of less than 1% in India's import basket before the start of the Russia-Ukraine conflict in February 2022, Russia's share of India's imports rose to 1.64 million barrels per day in March, taking a 34% share.
Has the price cap on Russian oil worked? ›But the early evidence suggests that the cap, in conjunction with other sanctions, has been pretty successful at keeping Russian oil flowing — while reducing the amount of money Russia reaps from its sale (predominantly to China, India and Turkey).
How could a Russian oil ban affect prices? ›
Universal enforcement of the insurance ban, imposed by the EU and U.K. in earlier rounds of sanctions, could take so much Russian crude off the market that oil prices would spike, Western economies would suffer, and Russia would see increased earnings from whatever oil it can ship in defiance of the embargo.
Why can't we buy oil from Russia? ›That would free up other supplies from sources such as Norway and Saudi Arabia to be redirected back to Europe. Russia's oil has high sulfur and other impurities, so refining it requires specialized equipment – it can't be sold just anywhere. But other Asian buyers can take it, including India and Thailand.
Where does us get oil? ›The top five source countries of U.S. gross petroleum imports in 2022 were Canada, Mexico, Saudi Arabia, Iraq, and Colombia. Note: Ranking in the table is based on gross imports by country of origin. Net import volumes in the table may not equal gross imports minus exports because of independent rounding of data.
Where does Ukraine get its oil? ›Ukraine imports most of its petroleum products from Belarus, Russia, and Germany. Crude oil imports, sourced increasingly from Azerbaijan and Kazakhstan, supply Ukraine's sole operating refinery, the Kremenchug facility.
Why doesn't the US use its own oil? ›That happens because of a combination of economics and chemistry. The economics are simple: overseas oil, even after shipping costs, is often cheaper than domestically-produced crude. And, while the U.S. does produce enough oil to meet its own needs, it is the wrong type of oil.
How much oil does the US have untapped? ›Offshore. The Minerals Management Service (MMS) estimates the Federal Outer Continental Shelf (OCS) contains between 66.6 and 115.1 billion barrels (10.59×109 and 18.30×109 m3) of undiscovered technically recoverable crude oil, with a mean estimate of 85.9 billion barrels (13.66×109 m3).
Does US produce enough oil for itself? ›Well, yes, we have. But that statement, while true in some ways, covers up several decades of short-sighted energy policies. The U.S does indeed produce enough oil to meet its own needs.
What does Russia import the most? ›Russia imports machinery and equipment, vehicles, consumer goods, foodstuffs, chemical products, industrial consumer goods. Major trading partners of Russia are Germany, Italy, China, Turkey, Poland, Switzerland, United Kingdom, United States, and Finland.
What is Russia's deficit? ›Net exporter Russia typically posts budget surpluses, but its Jan-April budget deficit of almost $44 billion is already 17% higher than Russia's target for all of 2023, creating fiscal pressure as Moscow ploughs on with its military offensive in Ukraine.
What crop is Russia an important producer of? ›Russia has emerged as one of the major exporters of grains, especially wheat and barley.
Does the US produce its own gasoline? ›
At petroleum refineries, crude oil is broken into its various components, which are then selectively reconfigured into new products. U.S. refineries generally focus on producing gasoline to meet U.S. market demand, and they produce nearly all of the gasoline sold in the United States.
What is the real reason for high gas prices? ›Gasoline prices rise and fall with the price of crude oil, though not always in sync or to the same degree. Oil is a global commodity and as such, its price is determined primarily by global supply and demand. When supply is greater than demand, prices fall. Conversely, when demand is greater than supply, prices rise.
Did oil prices cause inflation? ›For decades, the conventional wisdom in macroeconomics has been that high oil and gas prices are frequently the leading cause of high inflation. In fact, many analysts have blamed the two major oil price shocks of the 1970s for high inflation during the decade.
Did the oil crisis cause inflation? ›The oil price spike in 1979 was accompanied by core inflation of more than 11%. It is not surprising that oil shocks have been blamed for at least some of the high inflation in this time period.
What caused the price of oil in the United States to skyrocket overnight in 1973? ›The 1973 energy crisis was an oil shock that caused energy prices to skyrocket and resulted in fuel shortages in the United States. The crisis was caused by the refusal of the Organization of the Petroleum Exporting Countries (OPEC) to sell crude to the U.S.
Who benefits the most from high oil prices? ›Shale producers
Shale oil producers are particularly well-suited to benefit from high gas prices given the relatively quick turnaround for extracting this type of oil. Shale is a type of rock that can be found Colorado, Utah, Wyoming and other states that contains oil and gas.
A drop in fuel prices means lower transport costs and cheaper airline tickets. As many industrial chemicals are refined from oil, lower oil prices benefit the manufacturing sector.
Are high oil prices good for the economy? ›Oil price increases can also stifle the growth of the economy through their effect on the supply and demand for goods other than oil. Increases in oil prices can depress the supply of other goods because they increase the costs of producing them.
Which country is the largest producer of oil? ›The Kingdom of Saudi Arabia is often cited as the world's largest oil producer. The country produces 13.24% of the oil consumed in the entire world daily. Saudi Arabia has the second-largest reserves of naturally occurring oil in the world after Venezuela.
Who is the largest exporter of crude oil in the world? ›Saudi Arabia has consistently been the world's top oil exporter, with an estimated 11 million barrels per day (bpd) in 2023. The country has the largest oil reserves globally, and its oil production accounts for nearly a third of the global oil supply.
Where does China get its oil? ›
Saudi Arabia is China's main crude oil supplier. In 2021, China imported nearly 81 million metric tons worth of crude oil from the Middle Eastern producing giant. In fact, the majority of China's oil imports originated from countries in the Middle East.
Where does US get most of its oil 2023? ›February 2023 Import Highlights
The remaining top ten sources, in order, were Nigeria (168,000 b/d), Brazil (141,000 b/d), Guyana (139,000 b/d), Ecuador (138,000 b/d), and Venezuela ( 58,000 b/d).
It often makes more sense for the refineries in the gulf to export some of their gasoline to Mexico, rather than expensively ship their product all the way to the east coast of the U.S., which gets cheaper gasoline from Europe. oil prices down which keeps prices in the U.S. lower.
Who is the US biggest oil supplier? ›About 8% of U.S. total petroleum imports and 9% of U.S. crude oil imports were from Persian Gulf countries in 2021. Petroleum imports from Canada increased significantly since the 1990s, and Canada is now the largest single source of U.S. total petroleum and crude oil imports.
What does the US import from Russia? ›| Characteristic | February 2022 | March 2023 |
|---|---|---|
| Inorganic chemicals | 71.93 | 247.67 |
| Cork and wood manufactures | 48.3 | 8.44 |
| Gas, natural and manufactured | 29.28 | 0 |
| Non-metallic minerals | 28.75 | 0.26 |
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Can crude oil be replaced? ›The main alternatives to oil and gas energy include nuclear power, solar power, ethanol, and wind power.
Will Russian oil price cap give buyers leverage? ›LONDON, Oct 5 (Reuters) - A price cap that Group of Seven (G7) countries want to impose on Russian oil will provide buyers with leverage to get better prices, a U.S. Treasury official said on Wednesday.
What is the Treasury Russian oil price cap? ›The level of the price cap, $60/barrel, is set high enough to maintain a clear economic incentive for Russia to continue selling oil on global markets.
Who is the biggest buyer of oil from Russia? ›As one might expect, China has been the top buyer of Russian fossil fuels since the start of the invasion. Russia's neighbor and informal ally has primarily imported crude oil, which has made up more than 80% of its imports totaling more than $55 billion since the start of the invasion.
Who is the largest buyer of Russian oil and gas? ›
Reliance and Nayara are the two biggest buyers of Russian crude but the big public sector giants like IndianOil Corporation (IOC), Bharat Petroleum (BP) and Hindustan Petroleum (HP) have also got into the game in a big way. “Everyone's buying. It has become a national sport,” says Katona.
What does capping prices mean? ›Capping is the practice of selling large amounts of a commodity or security close to the expiration date of its options to prevent a rise in the underlying's price.