Why a Price Cap on Russian Oil?

Prelims level : Economy Mains level : GS-III Economy - Effect of policies of developed countries on India’s interest.
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Why in News?

  • The implementation of the Price cap on Russian crude. 


  • Western countries including G7 nations, the European Union(EU), and Australia have agreed to a price ceiling of $60 per barrel of seaborne Russian Urals crude oil.
  • In an effort to punish Russia for invading Ukraine and limiting the profits accruing to Russia from oil exports, western countries have imposed the price cap. However, they also want to keep some Russian oil flowing in the global market so that supply is not drastically impacted and the energy prices are not further pushed. 
  • Thus the concept of a price cap is proposed, above which accessorial services like ship insurance, vessel clearances, etc. would not be provided to freighters carrying Russian oil. It should be noted that around 95% of global insurance for freighters by tonnage comes from European countries, specifically the United Kingdom.

Russia’s Response:

  • Russia initially responded by saying that the impact of the price cap on its output would be minimal.
  • However, later it was reported by Russian media that a mechanism was being worked in Russia to ban oil exports to countries that are supporting price cap and would be implemented by the end of 2022.
  • It was further reported that Russian oil would always be demanded for global consumption and economic growth. Though the supply chain might change.
  • Moreover, Russia is also considering a floor price against the price cap. 
  • A floor price intends to ensure that it did not sell below the price cap level.
  • This contrasting approach of both blocs would put Russian oil buyers, who want European insurance and other services to continue, in a serious bind.

Russia’s Output in the year 2022:

  • According to global media reports, Russia’s oil production increased by 2% to approximately 488 million tonnes between January to  November 2022. 
  • India and China are the countries that bought discounted oil. It should also be noted that France and the major oil producer nation, Saudi Arabia also purchased oil from Russia. 
  • Saudi Arabia used the discounted price to buy oil to operate its power plants and sold its own costlier variant to the world.
  • Furthermore, India’s External Affairs Minister S. Jaishankar highlighted that European Union’s oil imports from Russia were six times that of India between February 24 and November 17.
  • India’s Russian oil import was only around 0.2% of total oil imports in 2021-2022. However, Russia served as India’s top oil supplier in October and November. It was reported that in November, India bought 53% or nearly 3.7 million tonnes of all the seaborne Urals crude that Russia exported.

Behaviour of Global oil prices:

  • According to oilprice.com, Urals crude reached nearly $53 in contrast to $73 per barrel on November 8. 
  • Oil prices are fluctuating due to different global pulls. The prices settled in early December in the backdrop of hope that China would ease restrictions in response to protests and help spur the oil demand. 
  • Whereas ships carrying Kazakh oil are gathering in large numbers for passage through Turkish ports as Turkey has been insisting on proof of insurance from freighters, which takes time for verification, resulting in long queues.
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