The EU and its rich country allies are taking aim again at Russia’s ability to earn money from its vast oil reserves by moving to limit the price of Moscow's refined oil products.
The bloc is proposing that G7 allies cap the price of Russian diesel at $100 a barrel and set a separate cap of $45 for other cheaper oil products. The EU wants to bring in the measure on February 5 — the same date as its embargo on buying Russian oil products goes into effect. The news was first reported by Bloomberg.
It’s the second round of price caps on Russian oil; the EU, G7 and Australia last month agreed to impose a price cap on sales of Moscow’s crude in conjunction with an EU embargo on its member countries (except for Bulgaria) buying Russian seaborne crude.
That move imposed a cap on Russian oil at $60 per barrel. The price for Russia’s Urals grade crude was $47 per barrel as of Thursday, according to data from market intelligence firm Argus. That’s well below the $84 per barrel price of benchmark Brent crude, and a sign that the remaining buyers of Russian oil like India and China are squeezing Moscow for massive discounts.
Capping crude is already hitting Russia’s budgetary plans hard, and now the EU and its allies want to deal another blow against Russian refined products like diesel.
“Taking into account the effectiveness of the [price cap on Russian crude] … it is appropriate to introduce two additional price caps for petroleum products,” says the proposal by the EU’s External Action Service seen by POLITICO.
Janet Yellen, the U.S. treasury secretary who is on a tour of Africa this week, said: "I am encouraged we will be able to come to agreement by Feb. 5.”
The EU proposal suggests setting one cap of $45 per barrel on products that typically trade at a discount to crude, such as fuel oil and white oils, and a $100 per barrel cap for products that trade at a premium, including diesel and gas oil.
“It will have a significant effect on Russia because oil products are another way that Russia is able export its crude oil,” said Janis Kluge, senior associate and Russian budget watcher at the German Institute for International and Security Affairs.
With Moscow’s oil companies “already struggling” to export crude last year, they “tried to run their refineries at the max” to get customers for the crude, but this will no longer be as easy, he said.
Russia historically supplied more than half the EU’s total diesel imports, prompting concerns of a supply crunch once the embargo comes into force. But last-minute diesel purchases and low demand due to unseasonably mild weather reduce the likelihood of such a scenario in the short term, according to Eugene Lindell, head of refined products at the energy consultancy FGE.
The suggested diesel price cap is “relatively high,” he said, which “is good for consumers because it minimizes the chance of supply interruptions.”
Although the measure will cause “a big … reshuffling of flows globally,” Lindell expects diesel markets to be back to normal by April. Meanwhile, the EU will likely look increasingly to the U.S. and the Middle East for its refined fuels, he added.
The bloc’s ambassadors will formally discuss the proposal on Friday. They have to agree unanimously on the measure before getting the approval of other G7 member nations.