WASHINGTON, Dec 6 (Reuters) - When U.S. officials first
floated the idea of capping Russian oil export prices in
response to a planned European embargo in March, they pledged to
squeeze revenues to Russia's war machine, while avoiding a
devastating oil price spike.
But keeping Russian oil on the market and global prices low
soon became the bigger priority as oil prices jumped, people
familiar with the mechanism's evolution and energy analysts
The $60-per-barrel price limit on seaborne crude imposed by
G7 democracies and Australia on Monday bears that out, lining up
with current market prices.
Analysts said the cap will have little immediate impact on
the oil revenues that Moscow is currently earning. Russia said
on Monday the cap would not hurt the financing of its "special
military operation" in Ukraine.
The price cap is "an unhappy compromise that will do very
little to cut Russia's oil revenue" from current levels, said
Ben Cahill, an energy security expert at the Center for
Strategic and International Studies in Washington.
"I really think that the U.S. Treasury's main objective was
to defuse the EU shipping, insurance and services bans that are
part of the sanctions on Russian oil exports," Cahill said.
Russia's Urals blend crude for delivery to Europe
<URL-NWE-E><URL-E> was quoted at an average price $55.97 on
Tuesday, below the cap and down from $61.35 on Sunday.
The benchmark Brent crude price slid to its lowest
since January on Tuesday at below $80, extending a downward
trend as growing concerns about global demand offset any bullish
effects from the price cap on Russian oil sales.
Officials at the U.S. Treasury, the driving force behind the
G7 price cap, sought to evenly weigh reducing Russia's revenues
and maintaining supply, though market pricing influenced this at
times, a senior Treasury official told Reuters.
"There have been times when Brent has fluctuated an
enormous amount over the past eight months, where we were
worried about one over the other, but in general, we've created
these to be the twin goals that have equal importance."
The official said the price cap is "institutionalizing"
current market discounts, arguing that plans for the cap were
responsible for oil price declines over the past several months.
Analysts also attribute the drop in global oil prices to
a weakening global economy, COVID-19 lockdowns in China and the
OPEC+ group's decision to maintain steady production.
PRICES, RUSSIAN INCOME DECLINE
At the current price cap level, Russia would earn oil
export revenues of about $10 billion to $15 billion a month,
said Bob Yawger, director of energy futures at Mizuho in New
That is far lower than over $21 billion a month Moscow
earned in June, according to an
from the International Energy Agency (IEA), as Brent topped
At current oil price cap levels, Russia is earning about
the same as it did before talk of a Ukraine invasion started
driving prices up. Russia earned about $15 billion in June and
July 2021, before Russian troop buildups near Ukraine.
The $60 price cap level was agreed on Friday after fierce
debate. Poland, Lithuania and Estonia argued that European Union
countries should make the cap as low as $30, closer to Russia's
production cost, after an initial proposal of $65-70.
FUTURE CASH FLOW
As crude prices have fallen, the language surrounding the
price cap from U.S. officials has evolved from "reducing"
Russia's revenues, to "limiting" future cash flow.
U.S. Deputy Treasury Secretary Wally Adeyemo told the
Reuters NEXT conference in New York on Thursday that the cap
"will lead to Russia earning less revenue going forward and
having less money to invest in conducting the war."
"The key thing to remember is that we're starting at $60 but
we have the ability to...further use the price cap to constrain
Russia's revenues over time," Adeyemo said.
In July, Adeyemo said the goal was to eliminate the "risk
premium," or price increase that Russia had introduced into the
oil market with its invasion of Ukraine, to give Moscow less
money to "pay for their war machine."
If Moscow makes good on threats to curtail production rather
than sell oil to countries observing the cap, prices could shoot
higher, and that is where it could get tricky for the United
States and G7 allies.
U.S. officials "want to avoid that at all costs," said
Mizuho's Yawger, adding that this could mean that "suddenly
support for Ukraine starts to dry up."
PRICE SPIKE AVOIDED
Oil markets have shifted significantly since Russia's
invasion of Ukraine on Feb. 24 sent prices soaring.
Internal Treasury estimates around that time had showed that
global crude prices could exceed $150 with the EU embargo in
place and no mitigating measures.
And with the IEA predicting that oil markets could lose 3
million Russian barrels per day if the most stringent EU
sanctions were imposed, Barclays and Rystad Energy warned that
oil could hit $200.
Treasury's "true motivation after March has been primarily
to preserve Russian flows in the face of EU sanctions, which
they don't think were a good idea," said a source briefed on
Biden administration discussions.
"They believed if there was an oil price spike, not only
will it hurt us economically and politically, but it'll damage
Western support for Ukraine," in its fight against Russia's
As the G7 formed the plan, India and China have snapped
up heavily discounted Russian oil, and are
to continue big purchases outside the price cap, moves
by Treasury Secretary Janet Yellen.
(Reporting by David Lawder and Timothy Gardner; Additional
reporting by Noah Browning in London; Editing by Heather
Timmons, Marguerita Choy and Kim Coghill)