What Is The Russian Oil Cap, Exactly? How Should We Think About It?
One of these devilish innovations has been the arrival of a price cap on Russian crude.
This is new. It is also radical.
Here is how it works:
Put simply, this innovation puts a fixed price on Russian oil. The Putin regime can still sell the product on the global market but can only receive a certain oil price for their crude.
The level of the price cap was very contentious but was eventually agreed at around $60 which will hopefully find the sweet spot of ensuring the Russians will continue to sell their crude on the global market via the normal channels while also severely limiting their profits.
The risk is that a) they don't and b) it has some unplanned and unpleasant knock on effect.
The first thing to say here is that this whole concept is pretty wild!
We have been thinking about and been super intrigued by this new policy innovation for quite some time but were not entirely sure how to properly address it.
The main reason for that uncertainty is that an oil price cap is unprecedented. We have no modern equivalent. It is an entirely new policy innovation brought about to help combat Russia's main strength which, when you think about it, is pretty cool.
As we recoil with horror from what Russia is doing in Ukraine and seek to help as much as possible this is certainly one of the most creative and "out-of-the-box" approaches.
The challenge is that it is very unclear that it will work. It certainly seems unlikely to work smoothly and there were lots of fears that this could send oil higher.
As we covered in some depth above, so far those fears seem very misplaced!
There are a few further things to say around answering the question:
How should one think of this price cap?
It is very hard to know but there is one big positive that might seem hoaky from one perspective but we think could signal quite a momentous positive shift.
To begin with, there was lots of speculation that either:
A price cap would be impossible to agree on.
It would prove unworkable in terms of implementation.
And, if it was, it would wreak havoc on the global oil market and cause price increases.
Perhaps the most definite negative to say about this policy innovation is that we are still less sure it will work well. It may help the US that is energy independent and exports ever more but hurt many other countries.
The price cap sounds great and it does impact Russia but it certainly won't:
Stop the Russian war machine.
Likely halt the Russians from slipping their oil into unmarked "ghost" tankers
And the Russians are selling the "urals" crude at around these prices per barrel anyway.
With time they may quickly find ways to get the market price - whatever it is - for their oil.
But this may not be the most important aspect of this policy innovation.
What is truly significant about this concept is that it was a new and difficult achievement from a host of political actors that have very different interests and yet understand that our collective interests must take precedence if we are to have much of a hope against the likes of Vladimir Putin (or Xi Jinping).
One of the few positive aspects of the horrible Ukraine has been that it has made "the international community" (really just the US and Europe and a few other countries) both very united and very motivated in a way that they have not been in, well, decades.
You can see this renewed purpose in the rush by Finland and Sweden to join NATO.
You can see this rekindled determination in the tolerance, so far, of elevated energy prices in Europe on both the left and right politics.
And you can see it in the oil price cap policy innovation.
At least we are trying stuff and able to agree on it.
In 2019 a global oil price cap seemed like something that might never occur. 2022, however, has proven that lots of the old shibboleths for international policymaking and pragmatism have gone out the window.
The price cap could still wreak havoc, we suppose but the fact that oil has declined both before and after its arrival, pretty steadily at that, suggests that the market has adopted this new and very difficult new policy with some ease. Which is, in and of itself, pretty remarkable.
It is almost enough to put one in the Christmas spirit, despite the price of just about everything this season.
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