Yellen promotes plan to limit the price of Russian oil in global markets

The United States is pushing to implement a plan to force Russia to sell oil at artificially low prices on the world market, in order to deprive the Kremlin of funds for its war in Ukraine.

Speaking at a press conference in Bali, Indonesia, before the start of a meeting of finance ministers from the G20 major economies, Treasury Secretary Janet Yellen reaffirmed the Biden administration’s condemnation of the Russian invasion. from Ukraine. She said cutting her profits from crude oil sales “would deny her [al presidente ruso Vladimir] Putin the income his war machine needs.”

He also argued that limiting the price of Russian oil would further one of the administration’s main internal goals: reducing inflation.

“A price cap on Russian oil is one of our most powerful tools to address the pain Americans and families around the world are feeling right now at the gas station and the grocery store,” he said.

However, the price-cap plan relies on a complicated mechanism that has never been tried before, and some experts on global energy markets have said they believe it won’t work.

Limit tied to sanctions

The plan that Yellen is proposing is linked to a new set of financial sanctions that the European Union, the United Kingdom and the United States are preparing to impose on Russia.

To get its crude to market, Russia relies on various deals with international lenders, shipping companies and insurance companies. The current plan is to cut off Russia from those services starting at the end of this year. In theory, this would make it virtually impossible to export oil in the short term, and much more difficult in the future.

If fully implemented and successful, the results of sanctions could be bad for everyone. Russia would lose its oil revenues and the rest of the world would experience potentially devastating price increases due to the supply shock created by the abrupt withdrawal of Russian crude from the market.

What Yellen and the Biden administration are proposing is an “exception” to the ban. If Russia agrees to sell its oil at a price that is below a certain threshold, the level of which will be determined by the countries imposing sanctions, it will be allowed access to the services it needs to get the oil to market.

This would avoid a global supply shock and at the same time reduce Russia’s oil revenues.

Experts doubt

People deeply familiar with global oil markets say they don’t think the price-cap plan will work.

Julian Lee, an oil strategist from Bloomberg First Wordhe wrote in an analysis published by Washington Post that the plan “has very little chance of working”.

He wrote: “The calculation [de Putin] it will almost certainly be that cutting off Russian oil exports will do more damage to the economies of buyers in Europe than to Russia. Therefore, it is useless to expect him to agree to a price cap imposed by the West.”

When the VOA asked Edward C. Chow, nonresident senior associate at the Center for Strategic and International Studies, if he thought the price-cap plan was feasible, he provided a one-word answer.

“Did not say.

many solutions

Chow, who has spent 45 years working in the international oil and gas business, including 20 years with oil giant Chevron, said: “I’ve consulted every energy expert I know. And nobody thinks it can work.”

He listed a number of possible solutions, including alternative insurance arrangements, contracts that transfer the risk of delivery to the seller rather than the buyer, and extensive use of Russia’s national tanker fleet, one of the largest in the world, which Moscow could use to move. sanctions and avoid a price cap.

Chow, a former Georgetown University professor, said reading about the proposed price caps reminded him of teaching a graduate seminar on energy security.

“When I first heard about it, it struck me that it’s the kind of brilliant idea that a group of graduate students would come up with,” he said. “And teachers love that, because it’s a great teachable moment to explain why this wouldn’t work as a practical matter, if you understand markets.”

pressing forward

Doubts aside, the Biden administration appears intent on moving forward.

The Treasury secretary said Thursday that the level at which the price cap would be set has not yet been determined, but “we would want a number that would clearly give Russia an incentive to continue producing, that would make production profitable.” for Russia”.

If Russia refused to follow through, he noted, it would suffer in the short term, as it failed to get any revenue from oil that was ready for the market. And it would also face long-term costs related to shutting down production and losing market share as oil buyers began looking elsewhere.

“I think from Russia’s point of view, a price cap or price exception to a policy that would otherwise be even tougher on Russia is something they should be willing to accept,” said Janet Yellen.

Chinese and Indian

In the months since Russia invaded Ukraine and Western countries became more reluctant to buy Russian oil, China and India have stepped in to fill the gap, buying up to 1 million barrels a day and accounting for up to 20% of exports. From Russia. .

Whether demand will remain high is an open question, especially in China, where there are signs the economy is slowing significantly. It is also unclear whether either or both countries would respect a cap on Russian oil prices.

Assuming a price cap could be implemented, it would be a complex calculation. If Russia refused to sell oil below the capped rate, China and India could continue to buy their oil anyway, but would have the clout to demand a significant discount. At the same time, the removal of Russian oil from the general market would drive up the price of the commodity around the world, including China and India, which also buy oil from other producers.

If Russia agrees to sell oil below the cap price, China and India would have no incentive to pay anything above the cap rate.

“I am hopeful that China and India will see that observing a price cap would serve their own interests to lower the price they pay for Russian oil,” Yellen said.

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