The G7 agreed to a price cap on Russian oil Friday as Russia shut a major gas pipeline to Europe, citing maintenance issues, amid the already fraught European energy situation.
The countries agreed that they would prohibit “services which enable maritime transportation,” like shipping, of oil from Russia if it’s sold at a price higher than the price cap — an attempt to curb Russian profits from the sale of the fuel.
“Today we confirm our joint political intention to [finalize] and implement a comprehensive prohibition of services which enable maritime transportation of Russian-origin crude oil and petroleum products globally – the provision of such services would only be allowed if the oil and petroleum products are purchased at or below a price (“the price cap”) determined by the broad coalition of countries adhering to and implementing the price cap,” the group said in a statement sent out by the U.S. Treasury Department Friday.
The countries did not announce what the price cap would be, saying that this decision would come later.
“The initial price cap will be set at a level based on a range of technical inputs and will be decided by the full coalition in advance of implementation in each jurisdiction. The price cap will be publicly communicated in a clear and transparent manner,” the statement continued.
A Kremlin official said in response to plans of the price cap on Friday that Russia would not sell to any countries that participated in the price cap, rejecting any non-market principles associated with the sale of its energy products, Reuters reported.
Russia is the third-largest oil producer in the world. Some countries, including the U.S., have already said they will not import Russian oil, but other countries including China and India have continued to provide a market for this oil.
The refusal to ship Russian oil not sold below a price cap attempts to cut into these continued profits, Treasury officials said.
Countries like India and China, which have friendlier positions toward Russia than the West and have declined to condemn the country’s invasion of Ukraine in venues like the United Nations Security Council, could still purchase oil at or above the price set by the cap.
But a senior Treasury official said the cap, which is enforced through restrictions on shipping-related industries like marine insurance, is being designed in a way that will still make it more expensive for Russia to sell energy outside of the coalition of participating countries.
“If they choose to sell outside of the price cap coalition, it’s going to cost them more to sell because the services will be more expensive, and the countries they’re selling to will know that there’s a lower price out there that they can potentially get,” the official said.
Following Russia’s invasion of Ukraine, global oil prices spiked — as many feared global embargoes. However, in recent weeks, prices have calmed down as Russian barrels found other buyers and amid fears of a recession.
The G-7 countries include the United States, Canada, France, Germany, Italy, Japan and the United Kingdom.
Prior to the Russian invasion of Ukraine earlier this year, about 60 percent of the country’s oil exports went to European countries in the Organization for Economic Cooperation and Development (OECD), according to the International Energy Agency.
Energy market analysts doubt whether the price cap will have a significant effect on global energy prices since Russia has been able to continue selling its oil and gas despite waves of sanctions from the U.S. and Europe.
“The truth is that Russia is already selling their oil despite all these sanctions,” Phil Flynn, energy analyst with the Price Futures Group, said in an interview with The Hill. “[The price cap] is actually raising the risk to Europe that Russia will cut off their supply, especially when they’re going to be most vulnerable.”
Claudio Galimberti, senior vice president of analysis at Rystad Energy, said that the “devil’s in the details” when asked whether the price cap will be effective. He said it depends on what price the cap will be, adding that if India and China don’t abide by the cap it is “likely to fail.”
Galimberti said the vast majority of insurance for the barrels carried on oil tankers comes from Western countries and many barrels that carry Russian oil are European.
But, he said that other countries can set up their own insurance and eventually the ship issue can be resolved too, but this will create “a major efficiency loss.”
Patrick De Haan, head of petroleum analysis at gasoline price website GasBuddy said he does not believe the embargo will be effective because of China and India.
“I doubt China [and] India, which are already getting a pretty sweet deal on oil, are going to bite the hand that feeds them,” he said. He added that he does not expect this to have a big impact on oil markets or the price consumers pay at the pump.
Moscow this week shut down the Nord Stream 1 pipeline that feeds natural gas into Europe, saying it needed repairs. The pipeline was also shut down for 10 days in July. Some analysts see this as a retaliatory move against the West for its hostile positions against Russia.
Updated 3:31 p.m.