Russian oil price cap: Five things you need to know

Al Jazeera answers five key questions to better understand the effect of the EU and G7’s move.

EU oil ban
Together with an EU ban on Russian seaborne crude oil imports, the EU, Australia and G7 have announced a $60-per-barrel price cap on Russian oil. [Tatiana Meel/Reuters]

A price cap set by the Group of Seven (G7) as well as an outright ban by the European Union on Russian seaborne oil came into effect on Monday as the two blocs try to reduce the Kremlin’s ability to continue financing the war in Ukraine.

On Friday, the G7, EU and Australia agreed to set a limit on the price of Russian oil at $60 per barrel. Back in May, the EU announced a ban on Russian seaborne crude oil. The 27-member bloc also said a ban on imports of refined petroleum products will be enforced from February 5.

The ban covers more than two-thirds of Russian oil imports coming into the EU, according to European Council President Charles Michel. He referred to this ban as a symbol of EU unity and said in a tweet that it puts “maximum pressure on Russia to end the war”.

While the EU’s oil embargo also applies to EU operators that insure and finance ships carrying Russian crude oil around the world, it does not apply to Russian oil imports coming into the bloc through pipelines.

The Druzhba oil pipeline, which began operating in 1964, has been supplying Russian oil to many Central and Eastern European countries, including Germany, Poland, Hungary, Slovakia, the Czech Republic and Austria.

Germany, Poland and Austria have supported the ban, pledging to completely wean off Russian oil imports by the end of this year.

But Hungary, the Czech Republic, Slovakia and Bulgaria are still heavily dependent on Russian pipeline oil and will be allowed to continue imports temporarily until they develop alternative supplies. However, these pipeline imports cannot be resold to other EU nations or non-EU countries, according to the European Commission.

Here are five things to know about the effects of the EU oil import ban and price cap:

What does the ban and price cap mean for the oil market in the EU?

Before Russia’s war in Ukraine, the 27-member bloc was heavily dependent on Russian oil exports. In 2021, the EU imported $74.8 billion of crude oil and refined oil products from Russia.

These imports of Russian crude oil amounted to 2.2 million barrels per day, including 700,000 barrels per day via pipelines as well as 1.2 million of refined oil products, according to the International Energy Agency (IEA).

With the EU embargoes on Russian sea-borne crude oil coming into force on Monday and on refined oil products in February, the IEA also said the bloc will need to replace 1 million barrels of crude and 1.1 million barrels of oil products per day.

About 10 percent of oil imports coming in from the Druzhba oil pipeline will continue temporarily.

Mats Cuvelier, a Brussels-based lawyer focusing on EU and international trade, told Al Jazeera that the layered EU ban on Russian oil won’t have a big effect on demand and supply within the bloc in the short term.

“This regulation has been on the books for half a year already, giving EU nations enough time to find alternative oil supply routes,” he said. “The bloc has been focusing on replacing Russian oil supply routes with routes from countries in the Middle East and elsewhere, so the EU won’t face a crude oil shortage.”

Philipp Lausberg, an analyst focusing on energy policy at the European Policy Centre, shared a similar view and highlighted that the main effect of the oil embargo could be a rise in oil prices.

“Brent oil will be more expensive, and that is something the EU will have to prepare for,” he told Al Jazeera.

On the day the price cap kicked in, global oil prices rose as much as  2 percent.

But Lausberg said a global economic slowdown will reduce global oil demand in the coming months, which will reduce the oil price once again.

What does it mean for oil vessels dependent on EU finances and insurance?

The EU’s price cap and ban on oil imports also stops EU operators from “insuring and financing the transport, in particular through maritime routes, of Russian oil to third countries”.

According to Lausberg, this will make it particularly difficult for Russia to continue exporting its crude oil and oil products to the rest of the world.

“Many ships from India, China and other countries are insured by companies in Europe and the UK,” he said. “These ships are now subject to the EU, G7 and Australia’s rules on Russian seaborne crude oil. Russia, however, has said that their legislation does not recognise these rules, so how the Kremlin plans to continue exporting oil to these countries with these new rules is yet to be seen.”

FILE PHOTO: Model of natural gas pipeline and German flag, July 18, 2022. REUTERS/Dado Ruvic/Illustration/File Photo
[Dado Ruvic/Reuters]

What does it mean for Russia?

According to the IEA, Russian oil output is expected to fall 1.4 million barrels per day next year after the EU’s ban on seaborne exports of Russian crude comes into effect.

Cuvelier said Russian vessels could try to evade these sanctions by registering in the Marshall Islands or Liberia and removing their Russian flags.

“But this tactic is on the EU’s radar, and the bloc has beefed up its maritime security to ensure Russian vessels don’t evade sanctions in this manner,” he said.

Meanwhile, Kremlin spokesman Dmitry Peskov said Russia would not accept the recently announced price ceiling, adding that it needed to analyse the situation before deciding on a specific response.

Russia’s permanent representative to international organisations in Vienna, Mikhail Ulyanov, also tweeted, “From this year, Europe will live without Russian oil.”

“Moscow has already made it clear that it will not supply oil to those countries that support anti-market price caps,” he said. “Wait, very soon the EU will accuse Russia of using oil as a weapon.”

Russia has options for how it could retaliate. “Russia has warned it could completely ban pipeline oil to the EU, which could be challenging for the bloc’s countries dependent on this supply route,” Lausberg said.

“While oil supply through maritime channels can be easily replaced, land-locked countries will find it hard to find an alternative if Russia blocks pipeline oil,” he said.

Will countries that are not part of the rules be affected?

Countries like India, China and Turkey are also dependent on Russian oil and continue to import oil from Moscow.

Vivek Mishra, a fellow at the Observer Research Foundation in New Delhi, told Al Jazeera that Russia will most likely negotiate with major buyers like India and China and arrange currency swaps.

“While these mechanisms won’t be able to replace Russian revenue from Europe, it will certainly create a soft landing for Russia,” he said. “I don’t think India is going to lose much as a major buyer of Russian oil. If we go by both statements from Russia and India, it points to the trend of India buying oil from Russia.”

“If anything, India could likely negotiate for more rebates as prices will be capped globally and Russia will be in a position to lose much more because of lack of related factors such as insurance companies not willing to bet on Russian oil tankers,” he added.

How will the embargo and price cap affect the international oil market?

OPEC+, a group made up of the Organization of the Petroleum Exporting Countries and its allies, held a meeting on Sunday to discuss how to ensure the oil market isn’t distorted by the new rules.

It agreed to continue reducing oil production by 2 million barrels per day, or about 2 percent of world demand, until the end of 2023.

Lausberg explained that every oil producer except Russia is meant to benefit from these rules.

“These sanctions are mainly meant to punish Russia for its actions in Ukraine,” he said.

“But if Russia manages to export more oil by buying more tankers or using any other tactics, then how the rest of the world and the oil market responds is yet to be seen.” he said.

Source: Al Jazeera