IEEJ：December ©IEEJ 2022

Special Bulletin

A Japanese Perspective on the International Energy Landscape (613)

December 5, 2022

Western Agreement on Russian Oil Price Cap at $60/bbl
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn December 2, the European Union announced that it agreed to set a cap at $60 per barrel
on prices of Russian crude oil for marine transportation. The Group of Seven industrial democracies
and Australia have also agreed on the Russian oil price cap as an additional sanction on Russia for its
invasion of Ukraine. If Russian crude oil priced above the cap is subjected to marine transportation,
the Western countries will prohibit their insurance companies from accepting marine hull insurance
policies for such transportation. As insurance companies in the United Kingdom and Europe
underwrite most marine hull insurance policies, the price cap is designed to affect Russian oil imports
into non-Western countries.
The Russian oil price cap began to be considered under the leadership of the United States
at a G7 summit in Germany last June. The United States initiated a Russian energy embargo including
oil in March, followed by Canada and the United Kingdom. The G7 announced a Russian oil embargo
in early May and the EU (with some exceptions) followed suit in late May. In a bid to increase pressure
on Russia engaging in military aggression in Ukraine by reducing energy revenue that is the biggest
foreign currency earner for Russia and the most important for the Russian economy, Western oilconsuming countries launched the Russian oil embargo even at the cost of oil imports from Russia.
Given that oil exports are far more important than other Russian energy exports, Western countrieshad no choice but to implement the Russian oil embargo.
However, the Western Bloc’s Russian oil embargo triggered various international oil market
reactions and failed to achieve a cut in Russian oil export revenue as its major objective. First, theembargo led to international oil market price spikes in a manner to inflate Russian oil revenue. Second,
Europe, the biggest destination of Russian oil exports, retained their Russian oil imports until they
began to cut such imports in the second half of 2022 towards the year-end. Third, India, China andsome other countries increased Russian oil imports without joining the embargo. They have imported
Russian oil at discount prices due to Russian oil’s difficult position in the market. However, market
prices shot up under the Western embargo, preventing even discount prices from falling so much. As
a result, Russian oil export revenue reflecting price hikes and maintained volume is expected toincrease this year from the previous year, instead of declining.
As this issue has been understood, the Russian oil price cap has been devised to hold down
Russian oil revenue anyway. Since the cap was discussed and proposed at the G7 summit in June,relevant countries have considered a specific cap level, a mechanism to implement the cap and how tooperate the cap in view of complex business realities for the international oil market. How to operate
the price cap in the international oil market where various and complex business deals are done has
been a difficult issue. More difficult has been how to prevent any sharp fall in Russian oil exports andmaintain Russian oil exports at a certain level to avoid the further destabilization of the international
1IEEJ：December ©IEEJ 2022

oil market and price hikes while achieving the essential objective of holding down Russian oil revenue.
Even the United States that initiated the Russian oil price cap proposal wanted to prevent crude oil andgasoline prices from shooting up at least until the midterm congressional election in November.
Western countries have been required to strike a balance between the two objectives that trade off witheach other: cutting Russian oil revenue and avoiding any sharp fall in Russian oil exports that would
trigger oil price spikes.
The price cap at $60/bbl is viewed as striking a balance between the two objectives. East
European countries within the EU have reportedly called for a lower cap, reflecting their hardline
attitude against Russia. Greece known for its prosperous shipping industry has sought a higher cap.
Before the agreement on the cap at $60/bbl, speculators were talking about cap levels between $65/bbl
and $70/bbl. Final coordination might have gone in the direction of lowering the cap to hold down
Russian oil revenue.
While the price cap has been set, how its effects should be viewed is still uncertain. Up todate, Russian Urals crude oil, a benchmark crude for Europe, has been priced roughly at the cap level.
In this sense, the cap level meets the status quo. Even if the price cap is strictly enforced for thirdcountries, Russian oil revenue may not decline so much. Whether India and China would comply withthe price cap or how they would respond to the cap are uncertain. After British and other European
insurance companies withdraw their marine hull insurance policies, whether any substitute insurers
would emerge or what would happen next will have to be watched. Businesspeople familiar with theoil market predict that various countermeasures and loopholes may be devised. In such case, however,Russian oil will remain available in the international oil market, making it difficult for any upward
pressure on oil prices to emerge. Meanwhile, the agreed price cap at $60/bbl may naturally have to beadjusted to market realities. If crude oil prices fall, the price cap at $60/bbl may become meaningless.
The cap may then have to be lowered in line with the market trend. This kind of adjustment will be afuture challenge.
On the other hand, Russia’s reaction to the agreed price cap is the most uncertain factor. Asa matter of course, Russia has raised strong opposition to the price cap. In response to the Western
attempt to affect the Russian economy, Russia has threatened to stop oil supply to countries thatintroduce the price cap. Russia is expected to continue and enhance negotiations with India, China andother countries that have not participated in the Russian oil embargo. However, a central Russian
response may be to exert pressure on oil-consuming countries by indicating the potential oil supply
stoppage. Any partial oil supply stoppage may trigger market responses, exerting upward pressure on
crude oil prices. A major focus of attention may be how the OPEC-plus group of oil-producing
countries including Russia would respond to the price cap. On December 4, the group decided tomaintain a production cut of 2 million barrels per day. In the future, it may flexibly respond to relevant
developments.
Potentially, Russia may not only exert direct influence on oil supply but also take measuresagainst the oil price cap in natural gas and other areas to enhance pressure on the Western Blocincluding Europe. While the oil price cap has been set to roughly meet market realities, theinternational oil market is likely to become turbulent depending on whether Russia would take a waitand-see attitude or some reaction to the oil price cap system. We will have to closely watch future
Russian actions.

2Contact: report@tky.ieej.or.jp
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