EU Agrees to Oil Price Cap on Russian Exports

The European Union (EU) member states have agreed to limit the price of oil products from Russia, which will take effect on Sunday.

The European Union (EU) member states have agreed to limit the price of oil products from Russia, which will take effect on Sunday. The 27 EU ambassadors agreed to limit the price of diesel to $100 a barrel and the price of low-end products like fuel oil to $45 a barrel. The price limits are part of the G7’s plan to cut Russia’s export income. Shipping companies carrying Russian oil products will only be able to get insurance and financing from the West if they pay less than the price limit. The Swedish rotating presidency of the EU said this agreement is important as it is “part of the continued response by the EU and partners to the Russian war of aggression against Ukraine.”

Poland and the Baltics were successful in demanding a review of the cap level every two months. On the other hand, other G7 states, like the US, are not as interested in this mechanism because it could make energy markets less stable. The first review will be conducted by Mid-March and will consider the impact of the cap on the Russian budget and EU member states as well as its effect on the market, including any potential turbulence.

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The current market price for diesel is around $110-$120 a barrel, while the cap is lower. Due to the extra costs of refining and handling, high-quality refined fuels like diesel and gasoline are usually more expensive than crude oil, which is trading near $80 a barrel. However, since the full-scale invasion of Ukraine, diesel prices have increased as Russia was Europe’s largest external supplier of fuel, and many European buyers have already turned away.

The EU imposed a $60-a-barrel price cap on Russian crude oil in December, which also comes with a review every two months. The US led the way on the cap, following pressure from central and eastern European capitals, who argued that the level had to be adjusted regularly to keep reducing Russia’s war revenue. A senior Treasury official from the US defended the crude oil price cap mechanism, saying that the intent is not to crash the Russian economy but to force the Kremlin to choose between propping up its economy and paying for their war.

 

Some countries wanted to tighten trade sanctions against Belarus, a key ally and military supporter of Moscow in the war. This made it harder for the 27 capitals of the EU to agree on the cap level and come to a decision about the price cap. To reach an agreement on the price cap, the debate over Belarus sanctions has been shifted to a discussion later this month.

 

Tariq Saeed

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