After much procrastination, Western countries have finally agreed on the ceiling price set on Russian oil since December 5, ie $60 a barrel. In addition to this cap, Europe is simultaneously imposing, as planned for months, an embargo on the purchase of oil exported from Russia, the world’s third largest producer after the United States and Saudi Arabia.
This price cap, which may change over time, is made possible by the fact that the maritime oil carriers and the insurance companies that cover them against potential damage are mainly European, and therefore under the authority of the countries applying the embargo.
This measure comes from the G7 countries, the European Union and Australia. Its main aim is to reduce Russia’s income from its oil sales. The approach taken is to impose a price high enough to induce Russia to continue its exports, but with less revenue than it could earn in an unfettered market.
How will Russia react?
Many uncertainties surround the implementation of this historic measure. A first, perhaps the most important, concerns Russia’s attitude. The latter has already indicated that it will not sell its oil to the countries which will apply this cap.
Western countries are betting that Russia will have every interest in continuing to sell its oil, even with lower earnings, as it depends heavily on these revenues to finance its budget and its war in Ukraine.
However, Vladimir Putin, the Russian president, has shown with his gas sold in Europe that he is capable of putting his geopolitical interests ahead of the commercial benefits of his country.
Russia does indeed have a lever: by withdrawing part of its oil from the world market, in an already tight supply and demand context, Russia would certainly contribute to a significant rise in the price of a barrel. This would aggravate an inflation that Westerners are resolutely seeking to combat.
In the event of such a maneuver by Moscow, and given the gap that has been created between Saudi Arabia and the United States in terms of oil price management, Washington would probably be forced to dip once again into its strategic reserves. However, these have been in record use this year to mitigate prices at the pump, and the stock is at its lowest level since 1984.
Another uncertainty concerns compliance with this capping measure on the part of major oil consumers, including China and India. It is expected that these countries will not go ahead with this initiative, but it still benefits them, because it increases their balance of power in negotiating advantageous prices with Russia.
The implementation of this cap also raises its share of questions. Because the responsibility is attributed to maritime carriers and their insurers.
However, these actors have never deployed such a provision: failures are to be expected, given the will of Russia and certain allies to circumvent it.
Finally, the attitude of the OPEC+ countries (Organization of the Petroleum Exporting Countries and Russia) is important. These countries do not appreciate this attempt at a “cartel” of buyer countries put in place by the West: they fear that such a measure will subsequently be extended to other member countries.
In such a context marked by so many geopolitical upheavals, black gold should trade in 2023 in a market as tight as in 2022. With unpredictable repercussions on the economy and consumers’ wallets.