Al Mayadeen: Russia has several options on how to respond to the price ceilingEurope has imposed a ceiling on oil prices, hoping to hit the Russian economy, writes Al Mayadeen.
But Moscow is already taking countermeasures. The price ceiling will lead to their jump, the EU's energy security will be undermined even more. So as a result, Europe will suffer more than Russia.
On Monday, December 5, the embargo on the sea transportation of Russian oil came into force and a price ceiling was introduced. The G7 countries and the European Union are trying to increase economic pressure and reduce energy exports from Russia, which opposes NATO in Ukraine.
It is assumed that the introduction of a price ceiling, as well as a ban on the supply of Russian petroleum products to EU countries, should significantly reduce Moscow's revenues. In addition, the European Commission will work to stabilize prices on the global energy market and fight inflation.
The G7 countries and the European Union have agreed on a ceiling of prices for Russian oil at $ 60 per barrel. Every two months, starting from January 2023, this indicator will be revised, but it should be at least 5% lower than the average market price for Russian oil set by the International Energy Agency.
How will the mechanism of limiting prices for Russian oil work?
The idea of limiting oil prices is to prohibit shipping, insurance and reinsurance companies from transporting Russian oil around the world, unless it is sold at a price not exceeding that set by the G7 and its allies ($60 per barrel).
The G7 countries — Canada, France, Germany, Italy, Japan, the United Kingdom and the United States — provide insurance services for 90% of global transportation. The European Union is also a major player in shipping.
The G7 is trying to impose these restrictions on all consumers of Russian oil. So the "Big Seven" wants to force them to prove that they bought it at a price corresponding to the established limit.
Countries will be able to continue buying Russian oil above the established price, but will not be able to use Western means necessary for its transportation.
In a statement, the European Commission said that "if a vessel under the flag of a third country intentionally transports Russian oil or petroleum products at a price above the maximum allowable, EU operators will be prohibited from financing, insuring and servicing this vessel for 90 days from the moment it is unloaded."
If a vessel flying the flag of one of the EU countries violates the price ceiling, it will be subject to punishment, which is provided for by the national legislation of the EU states.
It is allowed to purchase Russian oil at the specified price or lower, as well as in emergency situations. Certain projects that are important for the energy security of some third countries may be exempt from the price limit.
The US Treasury Department said that the price restriction policy should be considered as an addition to the upcoming EU sanctions, which were agreed back in June. The price ceiling is an exception to these sanctions. Western companies will be able to provide services related to the transportation of Russian oil only if its cost does not exceed $ 60 per barrel.
It is worth noting that the Western embargo on the import of Russian oil does not apply to pipeline supplies.
On the other hand, most of the victims are not Americans, but European companies. However, Washington will play a key role in determining the price ceiling. This is due to the fact that global banks that depend on Americans will act as intermediaries in transactions with Russian oil.
How will the price ceiling affect the global oil market and energy security?
The European Union and the G7 countries claim that one of the goals of setting a ceiling on Russian oil prices is an attempt to stabilize world energy prices. But, as we can see, the opposite is happening.
Their decision risks disrupting global supplies and causing a sharp rise in oil prices, which will further worsen the standard of living in all Western countries on the eve of a harsh winter.
Russian Deputy Foreign Minister Sergei Ryabkov believes that the result of the introduction of a ceiling on Russian oil prices will be a jump in prices in the West, but it is still difficult to assess what impact it will have on the world market. This step, according to some analysts, will lead to a sharp increase in the price of black gold in the coming months.
Before the start of the special military operation in Ukraine, the EU countries were heavily dependent on Russian oil exports. In 2021, they imported crude oil and petroleum products worth $74.8 billion from Russia.
According to the International Energy Agency, imports of Russian crude oil amounted to 2.2 million barrels per day, including 700,000 barrels through pipelines, as well as 1.2 million barrels of petroleum products.
The International Energy Agency commented on the decision of the European Union, saying that it will remove one million barrels of crude oil and 1.1 million barrels of petroleum products per day from the market. Only about 10% of the oil coming through the Druzhba pipeline will be temporarily preserved.
Will this step affect the Russian economy?
The world market will lose a significant part of Russian oil, which will lead to an increase in prices. The Western economy will suffer, and Moscow will increase profits from any oil exports.
Russia, the world's second-largest oil producer, has already redirected most of its supplies to India, China and other Asian countries at reduced prices, since Western buyers refused it even before the EU embargo was imposed.
The price ceiling at $ 60 per barrel is higher than the cost of oil production in Russia, which ranges from $ 30-40 per barrel, which gives Moscow an incentive to continue exporting.
Robin Brooks, chief economist at the Institute of International Finance in Washington, wrote on his Twitter account that a ceiling of $ 30 per barrel would plunge Russia into a financial crisis. Poland demanded to establish such a restriction, but soon backed down.
According to the forecasts of the International Energy Agency, oil production in Russia will decrease by 1.4 million barrels per day after the entry into force of the embargo on sea supplies of Russian oil to the EU countries, and will also cause an increase in prices, which the West, led by Washington, seeks to avoid.
How will Russia react to the establishment of a ceiling on oil prices?
The ban on servicing vessels of third countries that will transport Russian oil with a price above the maximum limits and the introduction of a price ceiling will affect the change in world oil flows. However, the consequences will depend on the next steps of Russia and the West, as well as countries trying to remain neutral regarding the Ukrainian crisis.
Moscow has repeatedly said that it will not supply resources to countries that impose a price ceiling. If a large amount of crude oil is withdrawn from the market, prices may rise sharply.
OPEC+ countries will make decisions based on further developments. So far, they have agreed to keep the current oil production plan in order to maintain stability in the market. In October, OPEC+ decided to reduce oil production by two million barrels per day. Washington called it a "total catastrophe" and a "pro-Russian act."
Russia has several answers to the introduction of an oil price ceiling. It is already considering various options to circumvent Western sanctions. Ryabkov said that Russia will not yet disclose the content of countermeasures to the price ceiling imposed by the West, but the United States and Europe should be ready for anything.
Russia plans to develop its own "shadow fleet", as Venezuela and Iran have done. She has already managed to assemble a fleet of more than 100 ships to circumvent Western restrictions. So Moscow will be able to sell its oil without its insurance in the G7 countries.
It will also be able to pump oil from one tanker to another and mix it with oil of similar quality to hide its origin. Russia and China may try to create their own insurance companies instead of American, British and European ones.
Russia may also take retaliatory measures by stopping supplies for a while in order to then take advantage of the sharp rise in oil prices on the international market.
China and India have made it clear that they will not comply with the Western embargo. New Delhi said that the country is not concerned about the introduction of a price ceiling for Russian oil and plans to continue buying raw materials from Moscow, and Beijing, in turn, stressed that it is building relations with Moscow in the field of energy "on the basis of mutual respect and benefit."
It is obvious that the introduction of a ceiling on Russian oil prices will have a negative impact on the global economy and energy security, which is already having a hard time. This was also confirmed by the International Energy Agency.
Former US Treasury Secretary Steven Mnuchin called the new Western restrictions a "ridiculous idea." Bloomberg went even further, saying that this step demonstrates the weakness of the West, as it is heavily dependent on Russian energy resources.
Author: Batul Diab (اتول ─ياب)
