US official: Failure to implement the Russian oil price ceiling may raise oil prices

A 3D-printed oil drum model is shown in front of the stock chart shown below in this illustration taken, December 1, 2021. REUTERS/Dado Ruvic

TOKYO (Reuters) – The global price of oil could rise by 40 percent to around $140 a barrel if a proposed price cap for Russian oil is not adopted, along with sanctions waivers allowing shipments below that price, a large US price. A Treasury official said on Tuesday.

The official said US Treasury Secretary Janet Yellen will discuss implementation of the US price cap proposal and global economic developments with Japanese Finance Minister Shunichi Suzuki when they meet later on Tuesday.

The goal was to set the price at a level that would cover Russia’s marginal cost of production, the official said, so that Moscow would be incentivized to continue exporting oil, but not high enough to allow it to finance its war against Ukraine.

The official said Japanese officials had expressed concern about the price cap being too low, but had not rejected the potential price range of $40 to $60 a barrel.

Yellen is using her maiden voyage to the Indo-Pacific as Secretary of the Treasury to rally support for the proposed cap on Russian oil prices and answer nagging questions about its effectiveness if India, China and other countries that are now buying cheap Russian oil don’t get on board.

The United States and the Group of Seven other wealthy nations — Britain, Canada, Germany, France, Italy and Japan, along with the European Union — agreed in June to explore imposing a cap on reducing Moscow’s revenue and draining its war fund, but details are still being worked out. Read more

As the European Union prepares to gradually introduce a ban on Russian oil and ban marine insurance on any tanker carrying Russian oil, a move Britain is expected to meet, Yellen sees the cap as a way to keep oil flowing and avoid price hikes. It may lead to stagnation.

Price Exception

Washington has proposed a “price exception” that would scrap the ban on marine insurance for orders below the agreed-upon price to prevent millions of barrels per day of Russian oil production from being disrupted by underinsurance.

The Treasury official said the Treasury’s model showed that implementing sanctions without a price exception could lead to significant increases in crude oil prices, potentially to around $140 a barrel from about $100 a barrel now.

However, the official added, there was some uncertainty about the estimates, particularly around assumptions about the elasticity of oil demand.

The official said European, British and American companies account for about 90 percent of global oil shipping insurance and reinsurance, which will make it difficult for Russia to keep oil flowing once these sanctions take effect at the end of this year.

The official said that while some experts believed Russia, India and China could interfere with sovereign insurance, Treasury officials did not share that view.

(Andrea Shalal reports). Editing by Tom Hogg and Shri Navaratnam

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