Oil tanker discharging a cargo of crude oil from Primorsk, Russia, in England in 2019, photo courtesy of Darren Hillman
The G7’s Price Cap on Russian Oil Will Not Help Ukraine
On December 5th the G7’s price cap for Russian oil, backed by the European Union (EU), went into effect. The initial cap has been set at $60 dollars per barrel, with a price review every two months. Given that this has been a months-long policy initiative designed to choke Russia off from its energy revenues, this should be a major blow against Russia. This is not the case, for a variety of reasons. Firstly, the $60 dollar price cap is quite high, something both President Zelensky and countries such as Poland have criticized. Russia’s breakeven cost for oil production is likely between $30-40 dollars, meaning that Russia would still earn a decent profit. Secondly, due to discounts Russia has been offering to attract new buyers, Russia’s Urals blend of crude oil has traded either below or only slightly above the cap in recent weeks, meaning that a price cap will have little effect on Russia’s sales or revenue. Finally, the price review mechanism is designed to keep the cap at 5% below the market price for Russian oil, which likely won’t significantly impact Russian revenue going forward even as the cap adjusts.
The proposal to cap Russian energy exports faced major hurdles from the beginning, none of which seemed likely to be overcome. These included the refusal of India and China to participate, as well as the reluctance of OPEC adjust its oil output in accordance with Western plans. None of these countries have changed their stances on cooperation. Russia has also spent the last several months preparing itself to deal with any sanctions on its energy, such as procuring a fleet of older tankers in order to circumvent sanctions.
What all of this means is that the price cap will likely have little to no effect on Russia’s ability to wage war in the short term. This is the problem with the G7 and EU’s short-term policy line towards Russian energy exports. Shifting away from Russia in the longer term remains incredibly important and is something that European countries have undertaken, in some cases with significant success. The EU has signed a deal with Azerbaijan to increase natural gas imports, Germany recently concluded an agreement with Qatar to increase LNG imports starting in 2026, and LNG exports from the United States to the EU have also risen. The EU has also mostly stopped importing Russian oil, with certain carve outs for countries in Eastern Europe that are highly dependent on Russia. While some of these examples will not take effect for years, they represent important steps that will increase European energy security in the future.
However, while countries opposing Russia’s invasion can shift their economies away from Russian hydrocarbons, in the short term it is likely impossible to seriously restrict Russia’s global energy exports without endangering global energy security given the outsized influence that Russia wields on energy markets. Therefore, the restrictive mechanisms against Russian energy that the United States and the EU develop will not work. Thus, the key issue with the United States’ and the EU’s energy policy towards Russia is that they are focusing on an area where little can realistically be achieved. Moreover, promoting policies like this make the coalition against Russia seem toothless and weak when they publicly promote and adopt policies that look ineffective after months of negotiation.
There are also a variety of ways to better support Ukraine and to damage Russia’s economy. Firstly, coordinating with allies to ensure the enforcement of existing export controls should be a top priority, especially since this is an area where Russia is particularly vulnerable. Indeed, Russia has been desperately trying to acquire the advanced microchips needed to build advanced weaponry. Empowering the Commerce Department’s Bureau of Industry and Security would therefore be a wiser effort on the economic and sanctions front than energy measures.
More direct support to Ukraine would also be a more practical alternative, primarily in the form of humanitarian aid and technical components. This is especially crucial in light of Russia’s air campaign against Ukrainian infrastructure and the amount of damage that Russia has succeeded in inflicting. Ukraine also lacks the ability to produce many of the technical components required to maintain its infrastructure at the level required, so support from partners in this area is crucial.
Finally, countries supporting Ukraine need to also ensure that they are well positioned to make it through the winter with as little upheaval as possible. Countries across the EU including Germany, Finland, and France are all reportedly still facing blackouts throughout the upcoming winter, and the EU has seen protests in a variety of countries against European support for Ukraine. Preventing surges in anti-war sentiment during the winter needs to be a priority in order ensure cohesion in support for Ukraine. This means reorienting away from Russia, but also ensuring the stability of global energy markets and focusing on securing domestic energy needs. Given that Russia has sworn not to abide by a price cap and is actively considering establishing its own price floor in retaliation, the price cap could still have disruptive effects on global energy markets, despite its high price level.
All of these possibilities offer better ways to support Ukraine than targeting Russia’s energy exports. In the long term, reorienting away from Russian hydrocarbons will damage Russia’s exports on its own. Approximately 83% of Russia’s natural gas exports went through pipelines, and 78% of natural gas exports went to Europe. That means that Russia will have to either significantly build out pipeline infrastructure in other areas or heavily invest in LNG to adjust to Europe’s reorientation. However, in the short term, policies like the G7 price cap won’t have much impact, and they distract from other, more effective ways to aid Ukraine and ensure long-term support.
Image license under creative commons
