On 5th December 2022 Western countries imposed a price cap of $60 per barrel on Russian crude oil. This was followed on 5th February 2023 with a price cap of $100 per barrel on premium-to-crude products (such as diesel) and a price cap of $45 per barrel on discount-to-crude products (such as fuel oil). One year on from its initial implementation, has the oil price cap been a success?
It appears not. According to a new report by Finnish thinktank CREA, the price cap has “failed to live up to its potential”. The report’s main finding is shown below:
The y-axis shows the change in Russia’s oil export revenues by month. As you can see, the price cap initially dented revenues quite considerably, up to a maximum of €200 million per day. However, the impact subsequently lessened, averaging around €80 million per day over the last six months.
Overall, the researchers calculate that Russia’s oil export revenues over the last year were 15% lower thanks to the price cap – not nothing but not enough to fundamentally shift the Kremlin’s calculus. In fact, from July to December, Russian Urals crude oil was consistently trading above $60 per barrel. And at the end September, it was trading above $80 per barrel.
Why has the price cap largely failed? For three main reasons, the researchers say.
The first is insufficient monitoring and enforcement. Recall that the price cap was meant to work by denying Western shipping and insurance services for any sale where the agreed price was above the price cap. Yet in October, when Urals was trading well above $60 per barrel, almost half of Russian oil shipments were carried on tankers owned or insured by Western countries – in clear violation of the price cap.
The second reason is the ‘refining loophole’, which I’ve discussed before. Countries like India, Turkey and Singapore have been buying up large quantities of discounted Russian crude, refining it, and then selling it on to Western countries at a profit.
The third reason is Russia’s increased use of ‘shadow’ tankers (those owned and insured in countries not imposing the price cap). Before the invasion of Ukraine, 13% of Russian oil was transported on such tankers. As of October 2023, the figure was more than half.
CREA’s report contains another interesting graphic, comparing the prices of Russian Urals and Russian ESPO crude oil to the price of Brent crude oil. (The top chart shows the difference between the blue line and the red and orange lines on the bottom chart.)
Interestingly, by far the largest fall in the relative price of Russian crude occurs around the time of Russia’s invasion and the announcement of Western sanctions. The impact of the oil price cap (the second dip in the red line on the top chart) is comparatively small. In fact, both Urals and ESPO have been increasing in price relative to Brent since February/March of 2022.
This suggests that the main reason Russia’s oil export revenues have suffered since the invasion began is loss of bargaining power due to the Western embargo, with the price cap itself having had relatively little effect.
Of course, just as Russia’s bargaining power fell when it lost its biggest buyer, Europe’s bargaining power fell when it lost its biggest seller. In the oil market, Russia has to sell at a discount because buyers know it has fewer outside options. And by the same logic, Europe has to buy at a premium.
Although Western sanctions have hurt Russia’s oil sector, the oil price cap has not had a major effect above and beyond the measures that were announced back in February/March of 2022. This may change if Western countries decide to increase monitoring and enforcement – at the risk of spiking oil prices.