European oil sanctions will come into effect on December 5. The idea is to reduce Russia’s oil revenue due to the war in Ukraine.
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Analysts warn that upcoming sanctions on Russian oil will be “really disruptive” to energy markets if European nations don’t set price ceilings.
The 27 countries of the European Union agreed in June to ban crude oil purchases from December 5. In fact, the EU – along with the US, Japan, Canada and the UK – wants to drastically cut oil revenues. Russian mines in an attempt to drain the Kremlin’s war chest after the invasion of Ukraine.
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However, concerns that an outright ban would cause crude prices to skyrocket have prompted the G-7 to consider putting a cap on how much it will pay for Russian oil.
According to Henning Gloystein, director of energy, climate and resources at political risk consultancy Eurasia Group, an outright ban on Russian imports could be “really disruptive” to the market. .
Gloystein told CNBC on Wednesday that the potential upside in oil prices is “why there is pressure from the United States” to agree on a ceiling.
The price cap would cause G-7 nations to buy Russian oil at lower prices, in an effort to reduce Russia’s oil income without increasing the global price of crude.
However, EU countries have been in dispute for several days over the right price to limit the price.
Right oil cap
A proposal discussed earlier this week suggested a limit of $62 a barrel, but Poland, Estonia and Lithuania refused to agree, arguing that too high would reduce Russian revenues. These countries are among the most vocal in promoting action against the Kremlin for their aggressive actions in Ukraine.
Speaking to CNBC’s Julianna Tatelbaum on Wednesday, the Dutch energy minister said limiting Russian oil prices was a “very important next step.”
Rob Jetten said: “If you want effective sanctions to really hurt the Russian regime, then we need this oil-limiting mechanism. So hopefully we can agree on it as much as possible. as soon as possible”.
On Wednesday, Russian oil traded at around $66 a barrel. Officials in the Kremlin have repeatedly said that imposing a price ceiling is uncompetitive and that they will not sell their oil to countries that have imposed the ceiling.
They are hoping that other major buyers – such as India and China – will not agree to the limit and will therefore continue to buy Russian oil.
China and India
The G-7 nations agreed to impose limits on Russian oil in September and have been working on the details ever since. At the time, the EU’s energy director, Kadri Simson, told CNBC she was hoping China and India will support the price ceiling also.
Both countries increased their purchases of Russian oil after Moscow’s invasion of Ukraine, benefiting from discounted rates. Their participation is deemed necessary if restrictions on Russian oil are to work.
“China and India are very important as they buy most of Russia’s oil,” Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics, told CNBC.
“However, they will not commit for political reasons, as the limitation is a US-sponsored policy and [for] commercial reasons, since they already get a lot of cheap oil from Russia, so why jeopardize that? It is always naive to think that they will join voluntarily because Ukraine is not that important to them.”
Indian Oil Minister Shri Hardeep S Puri told CNBC in September that he has a “moral obligation” to his country’s consumers. “We will buy oil from Russia, we will buy from anywhere,” he added.
Thus, there are growing doubts about the real impact of the restrictions on Russia.
“Energy sanctions against Russia have come too late and too timidly,” Guntram Wolff, director of the German Council on Foreign Relations, said by email.
“This is just the continuation of a series of regrettably timid decisions. The longer and later the sanctions last, the easier it is for Russia to circumvent them.”
