The G7 has come up with the idea of ​​a cap on oil prices, but experts are wondering how effective this is.

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The world’s seven largest industrial nations are capping Russia’s oil prices to fund the onslaught in Ukraine and further squeeze the Kremlin’s ability to protect consumers in the midst of rising energy prices. I came up with an idea.

While the G7’s pursuit of Russia’s oil price caps is not without challenges, energy analysts are very skeptical of the integrity of the proposal.

As part of that, the Kremlin warns that attempts to impose price caps on Russian oil will do more harm than good.

How did the idea come about?

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The block received about 25% of oil imports from Russia and was one of the Kremlin’s most important buyers. Stopping these oil purchases is an attempt to hurt Russia’s economy after a provocative invasion of Ukraine, given that some EU countries are heavily dependent on Russia’s fossil fuels. It is difficult to finish it overnight.

US President Joe Biden presented the remaining G7 leaders with ideas for oil price caps on the weekends of June 25 and 26, and his counterparts agreed to consider how to do so. The G-7 consists of the United States, Canada, France, Germany, Italy, the United Kingdom and Japan.

German Chancellor Olaf Scholz said the idea was very ambitious and required “a lot of work” before it could be realized.

A spokesperson for the European Commission, the EU’s executive body, said in an email to CNBC on Friday: “”

“In this context, as a European leader’s mission, the Commission will curb energy price increases, including assessing the possibility of introducing temporary import price caps as needed,” said the spokesperson. We will continue to work on the method, “he added, adding that the discussion will be dealt with. As an “urgent problem”.

How does the price cap work?

Energy analysts have questioned exactly how the G7 will impose price caps on Russian oil, which could backfire plans without the involvement of key consumers and make it feasible. We warn you that you may run out of time.

“I’m one of the headaches,” independent oil analyst Neil Atkinson told CNBC’s “Squawk Box Europe” Thursday.

“This only works if all the major producers and decisively all the major consumers work together to find a way to implement the plans they come up with,” he added. ..

“And in reality, among the largest consumers of Russian oil, or the largest consumers of Russian oil, are China and India.”

A tanker moored at a gas and oil dock in the port of Constanta, Romania.

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According to Atkinson, China and India have “greatly benefited” from discounts on Russian crude oil. Russian oil is selling at a significant discount of over $ 30 compared to the international benchmark Brent crude oil futures at $ 110 a barrel, which China and India are skyrocketing.

Atkinson also emphasized Russia’s lack of unity against the invasion of Ukraine, given that China and India did not explicitly condemn the Kremlin.

“In any case, the Russians just sit there and do nothing. They can play games with oil and actually gas supplies … they can ruin the G-7’s head in a way. This plan is really non-starter because it can be done. “

Do you really think Russia will accept this and not retaliate? This sounds like a very good theoretical concept, but it doesn’t really work.

Amartya Sen

Co-founder and Research Director of Energy Aspects

“To be honest, this mechanism doesn’t work,” Amrita Sen, co-founder and research director of Energy Aspects, told CNBC’s “Squawk Box Europe” on Friday.

“They didn’t ponder it, they didn’t talk to India and China … do we really think they would agree with this? And we actually accept this by Russia Do you really think you don’t retaliate? I think this sounds like a very good theoretical concept, but it doesn’t really work. “

Sen said the idea that countries around the world are on the same page as Western policy makers, especially related to energy security, is “the biggest misconception at the moment.” “I think it really needs to go away,” she added.

For Claudio Galimberti, senior vice president of energy research firm Rystad, insurance is the most direct mechanism for imposing price caps on Russian oil.

“London’s International Group of Protection & Indemnity Clubs covers about 95% of the world’s oil transport fleet. Western countries price by letting buyers maintain their insurance as long as they agree to pay more than a certain amount. You can try to impose a cap on the price of Russian oil on board. “

“But there are many obstacles that can upset such a plan,” he added.

According to Garinberti, one of the most obvious examples was the fact that Russia could simply decide not to sell at the capped price, especially if the benchmark was very low and close to production costs.

President Vladimir Putin has already shown his willingness to refrain from supplying natural gas to so-called “unfriendly countries” who refused to meet the gas payment demands on the ruble.

Garinberti said China is “the next and most likely obstacle.” For geopolitical reasons, Beijing may decide to “support Russia by accepting inferior Russian insurance and thus encourage loopholes in price caps.”

“Still, the EU has decided to ban Russia’s oil imports by the end of the year, so it’s time out, but price caps are certainly a measure worth considering at this stage,” Garinberti said. Said.

How did Russia react?

Russia warns that trying to limit Russia’s oil prices could disrupt the energy market and push up commodity prices even further.

On Wednesday, Deputy Prime Minister Alexander Novak said Western leaders’ move to consider imposing price caps was “another attempt to intervene in market mechanisms that could lead to market imbalances … [a] Price increase “.

Mr Novak said he is confident that Russia will return oil production to pre-sanction levels in the coming months. This is mainly due to the significant amount of Russian crude oil being directed to the Asian market.

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