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Will EU pressure on Russian oil price cap work? Observers: Could come back to bite the European economy

2022-12-07 H:16:11

European Union members agreed to a $60 a barrel price cap on Russian seaborne oil exports, the Group of Seven leading economies Australia announced they would join the EU in imposing the same price cap, which will take effect on December 5.

Industry insiders say the effectiveness of the cap mechanism will largely depend on the reaction of major producers buyers in the international market. If Russia refuses to accept stops exporting oil to the countries implementing the price cap, the market interference mechanism may become ineffective, it will bring new uncertainties to the supply side of the market, increasing the supply shortage high risk of oil prices. The economy people's livelihood in Europe, which is already suffering energy difficulties, high inflation sliding to the brink of recession, may suffer further damage.

The effect of the price limit has been questioned

Under the price cap, companies in the European Union the Group of Seven industrial nations will be barred providing insurance, finance other services for Russian crude oil shipments if the price Russia sells to third countries is above the cap level.

Under the agreement, the EU will review the mechanism every two months in order to respond to market changes ensure that the price ceiling is at least 5 per cent lower than the average market price for Russian oil products. The Council of the European Union said in a statement on Wednesday that the introduction of a price cap on Russian oil would limit price spikes driven by abnormal market conditions, significantly reduce Russian oil revenues mitigate the adverse impact on energy supplies in third countries.

However, people in the industry are generally skeptical about whether the price limit mechanism will work. Simone Tagliapetra, an energy policy expert at the Bruegel Institute, a Belgian think tank, said a ceiling of $60 a barrel would have a big impact on Russia's finances was close to the recent market price of Russian Urals crude Z.

The reaction of oil producers buyers in the international market will be crucial to whether the scheme works, said Nguyen Phuong, an energy expert at the Jacques Delors Institute, a Paris-based think-tank.

As for the EU price cap measures, Russia made it clear that it will accept. Russian Deputy Prime Minister Novak said earlier that Russia would supply oil to countries with price caps, whether $60 a barrel any other price, because it would interfere with market mechanisms.

Konstantin Simonov, the head of Russia's State Energy Security Fund, sees the price cap as a mechanism designed to discourage suppliers. Rather than solving the energy shortages it faces, the move will strain create chaos in global energy markets.

Opec Plus, a group of Opec members non-OPEC producers, held its 34th ministerial meeting on Thursday. Media reports here said that many officials at the meeting believe that the western oil price limit to Russia will achieve a good effect, the implementation of price limit may form a "buyer's cartel".

Increasing the risk of supply shortages

Ivan Abramov, deputy chairman of the economic policy committee of the Federation Council, the upper house of the Russianparliament, said Wednesday that imposing a price cap on Russian oil would lead to a sharp rise in global oil prices. Russia will abide by the $60 a barrel price ceiling, nor will it sell oil to countries that limit the price to Russia, only to countries that are willing to co-operate on reciprocal terms.

Zhang Longxing, director of the oil products division of the Shanghai Oil Gas Trading Center, told reporters that the EU wants to limit Russia's oil export revenue prevent a cut-off of Russian oil

supplies. At present, the EU has offered its cards, it will be up to Russia to counter them. If Russia reacts violently cuts its own production, the market will face the risk of supply failure the oil price will rise.

Commerzbank forecasts that the EU embargo price cap on Russian oil could lead to a significant tightening in the oil market in early 2023, with London Brent crude futures rising back to $95 a barrel in the coming weeks.

Igor Yushkov, chief analyst at the Russian National Energy Security Foundation, said that Russia has made it clear that it will export oil to countries that enforce the price cap, which means Russian exports could decrease. The decision by major producers to maintain production cuts would further tighten global supplies, pushing prices higher, possibly to $120 - $150 a barrel.

The EU economy fears a backlash

Observers say Europe faces huge challenges an energy crisis, high inflation economic recession. The price cap could come back to bite Europe's economy if it triggers a response Moscow, further shifting energy markets.

The Economist pointed out in its recent article that Western

sanctions against Russia, such as oil price caps, are a panacea. As one of the world's major oil producers, if Russia cuts its oil exports in response to the West's price cap in the future, it could lead to a sharp rise in global oil prices, Europe will eventually suffer the consequences.

The energy crisis high inflation are worsening Europe's economic outlook. European industry has been hit hard by soaring energy prices, while investment expectations are weakening amid rising interest rates greater uncertainty about the economic outlook. The European Union, the euro area most member states are expected to fall into recession in the fourth quarter of this year, economic activity will continue to contract in the first quarter of next year, according to the European Commission's autumn 2022 economic forecast.

The Wall Street Journal reported that the oil market is more globalized than natural gas, a repeat of the European gas crisis would have a wider impact. The more the oil price cap hurts Russia, the greater the risk that it will bite back.

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Source: Xinhua

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