By Rob Garver
The United States is pressing to implement a plan meant to force Russia to sell oil at artificially low prices on the global market, in order to deprive the Kremlin of funding for its war in Ukraine.
Speaking at a news conference in Bali, Indonesia, before the start of a meeting of the finance ministers of the G-20 large economies, Yellen restated the Biden administration’s condemnation of Russia’s invasion of Ukraine. She said that cutting its profits from crude oil sales “would deny [Russian President Vladimir] Putin the revenue his war machine needs.”
She also argued that capping the price of Russian oil would further one of the administration’s major domestic aims: reducing inflation.
“A price cap on Russian oil is one of our most powerful tools to address the pain that Americans and families across the world are feeling at the gas pump and the grocery store right now,” she said.
However, the price cap plan relies on a complicated mechanism that has never been tried before, and some experts in global energy markets have said they believe it will not work.
Cap tied to sanctions
The plan that Yellen is proposing is tied to a new set of financial sanctions that the European Union, United Kingdom and the U.S. are preparing to impose on Russia.
In order to bring its crude oil to market, Russia relies on various transactions with international lenders, shipping firms and insurance companies. The current plan is to cut Russia off from those services beginning late this year. In theory, this would make it practically impossible for it to export any oil at all in the near term, and much more difficult in the future.
If fully implemented and successful, the results of the sanctions could be bad for everyone. Russia would lose its oil revenues, and the rest of the world would experience potentially devastating price increases because of the supply shock created by abruptly removing 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 under a certain cap — the level of which is to be determined by the countries imposing the sanctions — it will be allowed access to the services it needs to bring the oil to market.
This would avoid a global supply shock while simultaneously reducing Russia’s oil revenues.
People deeply familiar with global oil markets say that they don’t believe the price cap plan will work.
Julian Lee, an oil strategist for Bloomberg First Word, wrote in an analysis published by The Washington Post that the scheme “stands very little chance of actually working.”
He wrote, “[Putin’s] calculation will almost certainly be that cutting off Russian oil exports will do more damage to the economies of buyers in Europe than it will to Russia. So it’s hopeless to expect him to acquiesce to a price cap imposed by the West.”
When VOA asked Edward C. Chow, a nonresident senior associate with the Center for Strategic and International Studies, if he believed the price cap plan was feasible, he provided a one-word answer.
“No,” he said.
Chow, who has spent 45 years working in the international oil and gas business, including 20 years with oil giant Chevron, said, “I’ve canvassed every single energy expert I know. And not one person thinks it can work.”
He listed a series of potential workarounds, including alternative insurance arrangements, contracts that shift the risk of delivery to the seller rather than the buyer and the extensive use of Russia’s domestic tanker fleet — one of the world’s largest — that Moscow could use to get around the sanctions and avoid a price cap.
Chow, a former professor at Georgetown University, said that reading about the proposed price caps reminded him of teaching a graduate seminar on energy security.
“It struck me, when I first heard it, that it’s the kind of bright idea a group of grad students would come up with,” he said. “And professors love that, because it’s a great teaching moment to explain why this wouldn’t work as a practical matter, if you understand markets.”
Doubts aside, the Biden administration appears to be intent on pressing forward.
The Treasury secretary said Thursday that the level at which the price cap would be set has not yet been determined, but that “we would want a number that clearly gives Russia incentive to continue to produce — that would make production profitable for Russia.”
If Russia refused to go along, she noted, it would suffer in the short term, as it failed to realize any revenue from oil that was ready for market. And it would also face long-term costs related to shutting down production and losing market share as oil buyers began to look elsewhere.
“I think from Russia’s point of view, a price cap or price exception to a policy that would otherwise be yet harsher on Russia is something that they should be willing to go along with,” Yellen said.
China and India
In the months since Russia invaded Ukraine and since Western countries became more reluctant to purchase Russian oil, China and India have stepped in to fill the gap, buying up to 1 million barrels per day, and accounting for as much as 20% of Russia’s exports.
Whether demand will remain high is an open question, especially in China, where there are signs the economy is slowing significantly. Also unclear is whether either or both of the two countries would abide by a cap on Russian oil prices.
Assuming that a price cap could be implemented, it would be a complex calculation. If Russia refused to sell oil below the rate at which the cap is set, China and India might continue purchasing its oil anyway but would have the leverage to demand a significant discount. At the same time, the removal of Russian oil from the broader market would drive up the price of the commodity around the world, including for China and India, which also buy oil from other producers.
If Russia does agree to sell oil under the price cap, China and India would have no incentive to pay anything above the capped rate.
“I’m hopeful that China and India will see that observing a price cap would serve their own interests in lowering the price that they pay for Russian oil,” Yellen said.