Explained | What impact will the G7’s $60 price cap on Russian oil have on markets? Premium

Will imposing a price cap on oil purchases from Russia impact the flow of Russian oil to global markets?

The story so far: On December 3, the Group of Seven (G7) nations and Australia said a consensus had been reached on a $60 price cap on Russian seaborne crude oil, a day after the European Union (EU) said member countries had agreed on the price cap. The price cap is likely to come into effect on December 5 or ‘very soon thereafter’, the G7 and Australia said in their statement. Russia could continue to sell at prices higher than the cap but services such as insurance for freighters carrying the oil, or vessel clearances would not be available from Western nations.

The price cap plan is the latest of the sanctions proposed by Western countries against Russia for its invasion of Ukraine. For the past few months, U.S. and EU officials have been trying to convince countries including India, China and Turkey to join the coalition or to at least support the price cap, which they say is in the interests of all oil buyers from Russia as it will give them leverage to lower purchase prices.

For countries that join the coalition, it would mean simply not buying Russian oil unless the price is reduced to where the cap is determined. For countries that don’t join the coalition, or buy oil higher than the cap price, they would lose access to all services provided by the coalition countries including for example, insurance, currency payment, facilitation and vessel clearances for their shipments. G7 countries had earlier said they were aiming to reduce the price of oil, but not the quantity of oil that Russia sells, so as to control inflation globally while hurting the Russian economy and its ability to fund the war in Ukraine. This could only work, of course, if all countries joined the coalition. However, if Russia is able to sell large enough volumes of its crude at a price higher than the cap, it would mean a huge squeeze on oil availability to the coalition countries, especially the G7 which are major consumers, and could result in global oil prices skyrocketing.

Russia said on Saturday it would continue to find buyers for its oil, despite what it said was a ‘dangerous’ attempt by Western governments to introduce a price cap on its oil exports, Reuters reported.

Russian President Vladimir Putin and high-ranking Kremlin officials have repeatedly said that they will not supply oil to countries that implement the price cap.

In comments published on Telegram, Russia’s embassy in the United States criticised what it said was the “reshaping” of free market principles and reiterated that its oil would continue to be in demand despite the measures.

“Steps like these will inevitably result in increasing uncertainty and imposing higher costs for raw materials’ consumers,” it said.