Global Courant 2023-05-19 05:16:24
In early June, at the behest of the Biden administration, German leaders gathered top economic officials from the Group of 7 countries for a videoconference with the aim of dealing a major financial blow to Russia.
The Americans had tried in a series of one-off calls last year to sound out their counterparts in Europe, Canada and Japan on an unusual and untested idea. Government officials wanted to try to limit the price Moscow could charge for every barrel of oil it sold on the world market. Treasury Secretary Janet L. Yellen had floated the plan a few weeks earlier at a meeting of finance ministers in Bonn, Germany.
Reception was mixed, partly because other countries were unsure how serious the government was about proceeding. But the call in early June left no doubt: US officials said they supported the idea of an oil price cap and urged everyone else to join in. At the end of the month, the leaders of the Group of 7 signed on to the concept.
As the Group of 7 prepares to meet again this week in Hiroshima, Japan, official and market data suggest the untried idea has helped achieve the dual original goals since the price cap went into effect in December. The cap appears to be forcing Russia to sell its oil for less than other major producers, while crude oil prices are significantly lower than levels immediately following Russia’s invasion of Ukraine.
Data from Russia and international agencies suggest Moscow’s revenues have fallen, forcing budgetary choices that government officials say could hamper the war effort. Motorists in America and elsewhere are paying much less at the gas pump than some analysts feared.
Russia oil revenue in March were 43 percent lower than a year earlier, the International Energy Agency reported last month, even though total export volumes had grown. This week, the agency reported that Russian revenues had recovered slightly, but were still 27 percent lower than a year ago. Government tax revenue from the oil and gas sector was nearly two-thirds lower than a year ago.
Russian officials have been forced to change the way they tax oil production in an apparent attempt to make up for some lost revenue. They also seem to be spending government money trying to build their own network of ships, insurance companies and other essentials of the oil trade, an effort that European and US officials say is a clear sign of success.
“Russia’s price cap works and works extremely well,” Wally Adeyemo, the deputy finance minister, said in an interview. “The money they spend building this ecosystem to support their energy business is money they can’t spend building missiles or buying tanks. And what we will continue to do is force Russia to make these kinds of difficult choices.”
Some analysts question whether the plan works nearly as well as government officials claim, at least when it comes to revenue. They say the most cited data on the prices Russia receives for its exported oil is unreliable. And they say other data, such as customs reports from India, suggest that Russian officials are using extensive deception measures to get around the limit and sell crude oil at prices well above the limit.
“I’m concerned that the Biden administration’s desperation to claim victory with the price cap is preventing them from actually acknowledging what isn’t working and taking the steps that could actually help them win,” said Steve Cicala, an energy economist at Tufts University has written about possible evasion under the cap.
The price cap was conceived as an escape hatch from the financial sanctions the United States, Europe and others have announced on Russian oil exports in the immediate aftermath of the invasion. Those punishments include a ban on wealthy democracies from buying Russian oil on the world market. But in the beginning of the war, they essentially failed. It drove up the cost of all oil worldwide, regardless of where it was produced. The higher prices provided record export revenue for Moscow, while US gasoline prices floated above $5 a gallon and contributed to President Biden’s declining approval rating.
In December, a new round of European sanctions would hit Russian oil hard. Economists on Wall Street and in the Biden administration warned that those sanctions could knock oil off the market, sending prices back up. So government officials decided to try to exploit the West’s dominance in the oil shipping industry – including how it is transported and financed – and force a hard negotiation on Russia.
Under the plan, Russia could continue to sell oil, but if it wanted access to the West’s shipping infrastructure, it had to sell at a sharp discount. In December, European leaders agreed to set the cap at $60 a barrel. They followed with other caps for different types of petroleum products, such as diesel.
Many analysts were skeptical that it could work. A limit that was too punitive had the potential to encourage Russia to severely limit the amount of oil it pumps and sells. Such a move could send crude oil prices skyrocketing. Alternatively, an overly permissive limit would not have affected Russian oil sales and revenues at all.
Neither scenario happened. Russia announced a modest production cut this spring, but production remained largely at the same level as when the war began.
Fatih Birol, the executive director of the International Energy Agency, has called the price cap a major “safety valve” and a crucial policy that has forced Russia to sell oil for much less than international reference prices. Russian oil now trades for $25 to $35 a barrel less than other oil on the world market, Treasury Department officials estimate.
“Russia played the energy card, and it didn’t win,” Mr Birol said wrote in a February report. “Given that energy is the backbone of the Russian economy, it is not surprising that the problems in this area lead to bigger problems. The budget deficit is skyrocketing as military expenditures and subsidies to the populace far exceed export revenues.”
Biden administration officials say there is no evidence of widespread evasion by Russia, and Mr Cicala’s analysis of Indian customs reports does not explain the rising costs of shipping Russian oil to India, which are embedded in the customs data. A White House official told reporters traveling with Mr Biden in Hiroshima on Thursday that the leaders of the Group of 7 would introduce new measures to counter price cap evasion at their meeting this weekend.
There is no doubt that last summer the world avoided what was privately of the greatest concern to Biden officials: another round of skyrocketing oil prices.
American drivers paid an average of about $3.54 per gallon for gasoline on Monday. That was nearly $1 lower than a year ago, and it’s nowhere near the $7 per gallon some government officials feared if the cap failed to prevent a second oil shock from the Russian invasion. Gas prices are a slight source of relief for Mr Biden as high inflation continues to hamper his voter approval.
After a sharp rise in the months surrounding the Russian invasion, global oil prices have fallen back to late 2021 levels. Partly driven by economic cooling around the world, the decline continues even as major producers such as Saudi Arabia cut production have limited.
Falling world prices have contributed to Russia’s declining revenues, but that’s not the whole story. Reported selling prices for exported Russian oil, known as the Urals, have fallen twice as much as the world price for Brent crude oil.
The leaders of the Group of 7 meeting in Japan this week are unlikely to spend much time on the cap, instead focusing on other collective efforts to curtail Russia’s economy and earnings. And the biggest cap decision winners won’t be on top.
“The direct beneficiaries are mainly emerging markets and lower-income countries that import oil from Russia,” Treasury officials noted in a recent report.
The officials referred to a handful of countries outside the Group of 7 — notably India and China — that have used the cap as leverage to pay a discount on Russian oil. Neither India nor China have joined the formal cap effort, but it is their oil consumers who are seeing the lowest prices.
