Repercussions expected from EU's new price caps on Russian oil

BRUSSELS, Feb. 7 (Xinhua) -- The European Union (EU) has doubled its efforts to undermine Russia's oil exports revenue by imposing new price caps on Russian oil, which came into effect on Sunday. The new EU price caps are also applicable in G7 countries and Australia.

For the second time, western countries have come up with measures to limit Russian oil after agreeing to put a 60-U.S. dollar price cap on Russian crude oil in December. The policy adopted by the EU to impose an embargo on seaborne Russian oil also became effective on Sunday.

Price caps and embargoes imposed by western countries on Russian oil could bring volatility to international oil prices and result in a reshuffle of oil flows across the globe. In addition, the sanctions targeting Russian oil will likely backfire against the EU by pushing inflation higher after soaring levels recently declined.

NEW PRICE CAPS

The Council of the EU announced on Saturday that it had decided to set two price caps for petroleum products originating in or exported from Russia.

The price cap for petroleum products traded at a discount to crude oil is set at 45 dollars per barrel, while the price cap for petroleum products sold at a premium to crude has been set at 100 dollars per barrel.

According to the price cap rules, third-party countries can purchase petroleum products from Russia at or below the price caps. Countries that choose not to implement the new price tags will not gain access to technical assistance, brokering services or financing, or financial assistance related to the maritime transport of petroleum products.

The G7 countries provide about 90 percent of the relevant services for maritime oil trade, including insurance and reinsurance, said Ben Cahill, a Senior Fellow of the Center for Strategic and International Studies, in a report published in January.

A transitional period of 55 days is foreseen for those vessels carrying Russian petroleum products. The Council of the EU will also review the price caps every two months in a bid to make sure the measures are effective and influential.

The EU agreement on oil price caps, coordinated with G7 and others, will reduce Russia's revenues significantly, said European Commission President Ursula von der Leyen. Meanwhile, U.S. Treasury Secretary Janet Yellen commented that the new caps would "serve a critical role" in achieving the western countries' objective.

Russia has reiterated that it will not supply oil and oil products to countries that observe the price caps, which along with the embargoes, will send oil prices skyrocketing.

OIL PRICES FEARS

In the near term, the price caps and embargo measures against Russian oil may knock a substantial portion of the supplies out of the market, and prices will surge when supplies of oil products, especially diesel, are tightened as a result, analysts have said.

"When Russian exports are constrained, for whatever reason, that will, of course, cause some trouble in this whole reshuffle process," said Hedi Grati, head of fuels and refining research for Europe at S&P Global Commodity Insights. "Europe would be competing with other big importers, and that would cause upward pressure on pricing."

The United States and Europe have recently witnessed surging petroleum and diesel prices, which is partly attributed to the stocking of oil by European countries before the sanctions take effect and concerns over a shortage of supplies.

In the long run, the price caps and ban on imports of Russian oil by the EU will lead to a reshuffle of the oil flow routes on the international market, Zhang Longxing, director of the petroleum businesses department of Shanghai Petroleum and Natural Gas Exchange, told Xinhua.

There will probably be a shortage of oil products around the world, and prices of oil products like diesel will soar. Meanwhile, he added that U.S. exports of petroleum and diesel to the EU will rise.

In the reshuffle process, the EU will have to substitute Russian oil with oil imports from other countries and regions, such as the Middle East and the United States. Russia will likely ship more oil products to Asia, Africa and Latin America. Both the EU and Russia will have to deal with raised transportation costs.

The Russian Ministry of Energy has said that the measures taken by western countries are illicit interference with the market and will disrupt the energy supply worldwide.

Russia will not cooperate with traders following the price caps imposed by western countries in any form, the ministry said, calling for joint efforts by relevant countries to make amends.

INFLATION RESURGENCE

Price caps and the import ban on Russian oil will undermine efforts made by the EU to tame spiraling inflation in the bloc and add to downward pressures for the economy.

In 2022, imports of Russian diesel by the EU stood at over 700,000 barrels per day, accounting for around 50 percent of its total diesel imports, according to media reports.

It will take a lot of work for the EU to substitute Russian diesel. The EU will need to pay hefty transportation costs for diesel shipped from other countries, even if it can find other suppliers.

Meanwhile, energy price hikes have been blamed for soaring inflation in the EU. Prices have come down moderately but are still hovering at high levels. European countries are still plagued by a cost of living crisis, leading to a spate of strikes in European countries, including France and Britain, where unions are demanding pay increases and better conditions for workers.

With inflation standing at 8.5 percent in January, the European Central Bank has been hiking interest rates aggressively to bring down inflation to its target of 2 percent over the medium term, according to European Union statistics agency Eurostat.

Igor Yushkov, an analyst of Russia's National Energy Security Fund, told Xinhua that the sanctions on Russian oil would diminish the efficiency of the global oil market, and consumers worldwide would end up paying the price.