Yves here. You cannot make this stuff up. The West thinks it has spared itself much pain from its Russian oil price cap scheme by allowing third parties to buy Russian oil at the capped price, then mark it up for G7 buyers. Permitting on-selling allows traders to store oil (as in combine it from several sources). And this regime will allow India’s practice of refining Russian oil and selling the resulting gas and other end-products.
In the meantime, Treasury Secretary Janet Yellen had said pretty much everyone in the world would have to participate, yet uptake has been pretty poor. As we indicated, even G7 member Japan has said it needs Russian oil. That’s a warning that Japan will only at most pretend to participate in the regime if Russia lives up to its promise of not selling oil at the Western cap.
By Michael Kern. Originally published at OilPrice
The United States and its Western allies have agreed that a cargo of Russian oil will only be subject to the price cap mechanism at the first sale of the oil to a buyer on land, sources familiar with the ongoing discussions told The Wall Street Journal on Friday.
This means that the upcoming price cap will not apply to the resale of the same Russian cargo. The price cap will not apply to a cargo of Russian crude processed into gasoline when the gasoline is sold, either.
However, intermediary sales and trades of Russian oil happening at sea should be subject to the price cap, according to the Journal’s sources.
The U.S. and the G7 allies and Australia are working on setting the details of the price cap before the December 5 deadline, after which the EU embargo on imports of Russian crude oil by sea enters into force. The G7 group of the most industrialized nations and the EU are looking to introduce a price cap on Russian oil, aiming to reduce Vladimir Putin’s oil revenues for his war chest. The allies will ban maritime transportation services for Russian oil unless the products are purchased at or below a certain price cap.
Reports emerged this week that the G7 members had agreed to set a fixed price for Russian oil exports as a cap rather than a price set as a discount to a benchmark, Reuters reported, citing an unnamed source familiar with the discussions. The price itself has yet to be determined, the source said, adding that, according to the G7, “This will increase market stability and simplify compliance to minimize the burden on market participants.”
Earlier, a price range in the mid-$60s was mentioned as a possible target for the cap as it represented the range in which Russian oil has traded before the last rally.
While considering all the parameters of a price cap, the U.S. Treasury issued this week guidance that says Russian crude oil loaded onto a vessel at the port of loading for maritime transport prior to December 5 will not be subject to the price cap if the oil is unloaded at the port of destination before January 19, 2023.
31 comments
Comments are closed.
Seems a rather ineffective measure, eh? Ineffective and stupid, reeks of desperation and incompetence. It doesn;t inspire great confidence in Mrs. Yellen’s abilities…..
The price cap can be stated in one sentence. The exceptions will take volumes. the scammers are scamming themselves.
I literally have no idea why Australia is attaching it’s name to this crackpot idea. So far as I know, we don’t import oil from Russia anymore. Certainly not since the beginning of the year. We use too but when Crimea went back to Russia, we climbed aboard the sanctions express and most oil imports got cut way back. Since we don’t import unobtainium, I suppose that we could also help put a price cap on that as well. But this sort of thing I would have expected from Scotty from Marketing before he got voted out. Looks like we now have Albo from Marketing-
https://tradingeconomics.com/australia/imports/russia/crude-oil-petroleum-bituminous-minerals
Aus are the yanks new favourite slave, after the AUKUS plot to get US nukes onto Australian land (a success by all accounts), the ozzies want to please their masters in any way they can, theyve pissed off the Chinese so need a new superpower to cling to. Australian ‘elites’ are as infantile, assinine and incompetent as all the others and by, they’re keen to prove it.
Can someone explain to an ultra-layperson as myself, how a price cap is supposed to work if Russia has stated they will not sell to any country that imposes the cap. Who, or what country, is buying oil at $60?
1. Forget everything you thought you knew about supply and demand.
2. Stroke your very selective concern for civilian populations and territorial integrity until stiff peak forms.
3.
4. Victory! (USA USA USA)
Surely to soft peak, if you are making a fool of yourself?
Exactly, if Putin makes good on his promise it will be painful for Russia but it will be disastrous for the world as due to the disappearance of a lot of oil from the market prices will surge and the western economies will screech to a halt. The question is who can stop breathing longer. It’s all mind-bogglingly stupid.
Russia can’t really lose, it has all the commodities, all the oil, the coal, the gas, the nuclear energy, its country will continue to function, the lights will not go off and businesses will not fail (especially their large MIC) This stupidity will not effect the war in Ukraine in any way, maybe the Russians will feel the need to speed it up and get it over with thus inducing more casualties. West are idiots, they still haven’t realised that the economy is nothing to do with money, it is energy. You can print a million dollars for every person in the country and give it to them free but its utterly useless if you can’t buy food or go anywhere to spend it, if there are no goods to buy, or no way of importing them, if you freeze to death in your home before spending it. You’d think Europe would have lerned its lesson after the last 9 months but nope, Ursula Van Der Leyen is hell bent on destroying it all, such a redundant cretin. I think she’s a CIA quisling, trojan horse, she ‘lived and worked’ in the US for a number of years, Washington I believe, means one thing to me, added to which she was mysteriously whisked into power at the very last moment as head of the EU (hastily seeking to end her job as German minister of Defence as the clouds of corruption allegations began to close in.) Every single move she makes destroys the EU economies and gives the US a temporary extension on its own demise.
If I were Russia, I would set up an new intermediary entity called Boris’ Definitely NOT Russian Gas Co, purchase all the Gasprom product, and resell it to Europe for $.01 less than what the US is currently jacking them for with the inflated LNG prices.
Its already got a name, Turkey.
Base it out of Crimea, perhaps. The West has been very clear that it doesn’t consider Crimea to be Russian.
“The G7 group of the most industrialized nations….”
Might be a slightly off topic thought but is this traditional comment (which is often quoted in many places, so am not criticizing the article) still factually correct?
Germany, US and Japan probably still count but both China and India have a lot of industry and are not G7, of course. Guess that the definition of “industrialized” matters but the UN Statista 2018 view based on manufacturing value added is as attached.
https://www.weforum.org/agenda/2020/02/countries-manufacturing-trade-exports-economics/
Maybe the definition of “industrialized” now stretches to incorporate financial services?
Such data does underline though that the G7 do not dominate global oil purchasing but collectively are just one key set of customers amongst others, particularly China and India.
Not the intro of this article made the image of Captain Picard with head in hands flash before my eyes.
The whole scheme is absurd in its convolutedness.
It’s night time over at my place so forgive me if I am a bit slow. Let’s say the market price of oil right now is 90 bucks, are they thinking of capping Russia’s take to 60 while benefiting some third party to the tune of 30 dollars? You were paying 90 dollars before and you’ll be paying 90 dollars afterwards? Or are they thinking that countries like India, etc will be happy with a 10 to 20 dollars markup?
Well, I don’t think India or any other country will sell oil at below market prices. Thanks to the Fed raising interest rates, everyone’s looking for US Dollars. Speaking of India, the Rupee has already depreciated close to 10% so India will be looking to refill her reserve coffer.
And why would Russia ever “agree” to this hair brained scheme?
what we are witnessing is the absurdity of thinking free trade will work. except it cannot. everyone wants to cheat at the expense of others. there will be lip service by most of the nations, as they view other nations as prey.
This isnt free trade though. Price caps are the antithesis of free trade. This policy is an acknowledgement that free trade does not work [at whatever it is our better’s are trying to accomplish]
except they are trying to get everyone to agree to a policy, just like under free trade. i used free trade as the example that you cannot get everyone to agree and abide by rules.
The US is attempting to enforce a monopsony. Truly weird. This is the perfect measure of neoliberal absence from what I like to call the reality based world. Don’t let genius-girl Yellen teach Econ 102 to your kid.
In addition to the parties of this G7/EU deal that would profit, maybe a couple of other things factor in:
There are countries that are going to blame subsequent problems on Russia not selling them oil. And the overall objective is to sell the idea of Russia cutting off oil (if it comes to that) as an “aggression.”
Alot of people are not paying attention to details and this is going to be a long conflict. These kind of details fall down the memory hole.
Well, that’s my wild take and no crazier than their scheme.
So, since we’re back to medieval mercantilism, can we definancialize now?
I have never got my head around the price cap. I keep thinking of going to the store:
Cashier: That will be $7.95.
Me: I’ll pay $2.49 for it.
Cashier: No you won’t. It’s $7.95.
I know big-time macroeconomics is not like household budgeting, but it seems so obvious to me. What am I missing?
It comes down to the leverage of each side. You have no leverage in your example, but if you were Andrew Carnegie buying iron ore for his steel mills you would be in a much better position to dictate the price as Mr Carnegie did (before he started buying the iron ore producers directly at least)
Except that as Yves and contributors have explained repeatedly, the leverage is not there either. So it’s basically Mel’s example, and Mel also thinks they have the leverage to make it work. Basically add:
…
Me: I said I’ll pay $2.49 for it.
Cashier: I heard, and it’s still $7.95.
Me: Nobody will pay that price! I need it! Take my $2.49
Cashier: Please get out of my store, the man behind you wants to pay $7.95 and I’m inclined to charge him $7.50 just to spite you
Me: You nazi communist devil I’ll give you $2.49 and you’ll like it!
Cashier: No soup for you!
This new wrinkle is semi-smart, because it really functions as a very big bribe to the entities that buy Oil from Russia. If, say, India goes along with it – and Russia for some reason cooperates – then India gets a LOT of free money when it sells the oil to a “Rules-Based-Order” country. So, countries like India & Turkiye might be tempted to at least use this as a lever in price negotiations with Russia.
But it’s only semi-smart, because there are some obvious ways around it. Russia could pretend to sell oil to a 3rd party at the G7-mandated price but collect a kickback of some sort. Russia won’t want to appear to cooperate with the G7 scheme, though, so the 3rd party couldn’t count on the arrangement staying secret…
Yeah, I don’t see how this makes Russia more likely to sell below the cap price. If I offer to buy Microsoft shares at market price from anybody who acquires them at half the market rate, for example, it will make not the slightest difference to trading. Yes, it would be a big windfall for anybody that was able to buy, but who’s going to sell to them?
The only way it can work is if enough buyers sign up that Russia genuinely has no choice but to comply. We know the US has already attempted to engineer that exact state, and offering a bribe like this is a pretty clear indication that they’ve failed.
Russia could try some Definitely Not Russia Co. shenanigans to try and capture the excess, but it would be high risk – the US would almost certainly be looking out for it, and I think it’s about 50/50 whether they would look the other way (in order to maintain the façade of successful sanctions for domestic consumption) or crack down on it. In any case, it wouldn’t get them anything that they wouldn’t have received from holding out for market price in the first place.
This reminds me of (alcohol) prohibition, where Jews could have wine “for religious purposes” and Doctors could prescribe booze “for medicinal purposes.” Sheesh! You can still see some whisky with “for medicinal purposes only” printed on the label. Oh, and anyone can be a rabbi.
One might almost believe the U.S. isn’t a serious country.
Can someone please explain to me how this price cap idea is not any different from colonialism? Ok, so the target is Russian oil, but once the legislation is in place, what prevents western countries from applying the same idea to other countries and products? Colonialism has just been about rich countries taking what they want from poor countries for some token compensation. This price cap scheme looks like the same thing, just without military backing.
For example, I can imagine a situation maybe 20-30 years from now when Europe is fully electrified and needs some rare and expensive electronics metal only found in some African country, and would set a price cap on that metal by referring to some war or human rights violation that shouldn’t be funded. Is there anything that would prevent this?
If you look at this as an opportunity for graft it kinda makes sense.
People who taught us about free market economics now are for a command economy. So socialism works better, must we believe?
But but but … the markets must decide, until I guess the west decides they don’t. West has lost all its credibility, the little integrity it had and is viewed by the majority of the world as a defunct, amoral, corrupt seething mass of incompetence and grift. This is the future recipe for a completely isolated West. Forgive them lord, for they know not what they do. Boy they sure look like dunces already but this one jumps the shark.