The clock is ticking on a Russian oil price cap


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Good morning from London. With our US colleagues tied up with that peculiar but much-loved tradition of doing Christmas-without-the-presents a month before actual Christmas, the UK energy team is running the show.

If you need some respite from all the giving of thanks, consider Energy Source your refuge.

No one will try make you have a second slice of pumpkin pie. Sweet potatoes will remain unmolested by marshmallows as long as the UK has a say. And the only mention of Planes, Trains and Automobiles will be in the context of the oil they consume.

So without further ado, let’s (thankfully) get going. — David

Mind the price cap

After months of deliberation the G7 (plus Australia) is inching towards an announcement on where its much-vaunted price cap on Russian oil supplies will sit.

Since it was first floated this summer the dual aims of the price cap plan have been relatively clear: reduce the revenues going to Vladimir Putin’s Russia as it wages war on Ukraine, but perhaps more importantly (depending on which policymaker you ask), making sure that Russian oil remains on the market.

There have been a few sticking points, not least of which is Russia’s refusal to deal with any country that signs up to the cap plan. But the G7 is determined to have a deal in place before December 5, when EU sanctions banning seaborne imports of crude to the bloc take effect.

The outstanding question is at what level the cap will actually be set at. In the next couple of days, EU members are expected to hash out a level they can collectively get behind. The US and UK have published detailed guidance of how the plan will work, including rules restricting price-cap compliant oil from being easily resold at higher price points.

European countries such as Poland, which are more hawkish on Russia, are likely to favour a lower price. Others are more cautious, worrying that setting the level too low could lead Russia to restrict output temporarily to cause chaos in the oil market, with Moscow having already weaponised gas supplies against Europe.

The view from the US is it does not really matter if Russia signs up to the plan or not.

While there’s arguably a bit of goalpost shifting in this stance, it’s predicated on the belief that so-called third countries like India and China, which are likely to keep buying Russian oil, will still be able to use the price cap to negotiate cheaper oil deals.

The hope is Russian barrels flow, benchmark oil prices don’t overreact and endanger the world economy, and Russian revenues fall as India and China drive a hard bargain.

It’s a neat sounding idea, but as many traders have pointed out it is, as yet, untested in the real world.

Moscow will be incentivised to participate in the scheme because its failure to do so would allow G7 countries to effectively ban tankers that wish to carry Russian oil from accessing all manner of maritime services from insurance to ship brokers.

Without insurance in particular — and the UK is on board with denying access to the crucial Lloyd’s of London market — it will become difficult for Russia to access enough vessels to keep its seaborne crude exports flowing.

Cutting back exports would only be a short-term option unless Russia wants to shut in production and risk long-term damage to its oilfields, goes the argument.

Vitol, the world’s largest independent oil trader, is predicting that while Russia has bought up some old tankers to help get its oil to market independently, volumes could still fall by about 1mn barrels a day early in the new year.

There is pressure, however, to ease back some of the restrictions on shipping. Tankers that carry Russian oil outside of the price cap may be banned for only 90 days from accessing western maritime services, rather than indefinitely. That will probably please Greek shipowners that have made good money shipping Russian oil since the invasion, and also those who are prioritising keeping Russia’s oil flowing over cutting revenues to Putin.

The latter has arguably become less important as oil prices have eased, declining from about $120 a barrel in June to $85 a barrel today for benchmark Brent. Russia’s main export grade, Urals, has a further discount of about $20 a barrel just by dint of market forces, as European buyers turn away.

If oil prices keep sliding there is some suspicion that the cap may end up being introduced roughly where Russia’s oil is already trading.

But the impact will still be one for the oil market to watch closely when the sanctions kick in on December 5, one day after the next Opec+ meeting. Lots of news to come.

Data Drill

OK, I may have told a white lie. Before you go rejoin the family fold here’s a Thanksgiving special data drill.

In the only Thanksgiving movie to ever make a mark overseas — the aforementioned Planes, Trains and Automobiles — Steve Martin attempts to drive back from Wichita, Kansas, to his family in the north shore suburbs of Chicago after his flight back from New York is diverted by bad weather. Enter John Candy. Hilarity ensues.

But how much would that journey cost today versus 1987 when the movie was released?

Well in 1987 the average price of a gallon of gasoline in the US was 90 cents, according to the US Energy Information Administration. That’s about $2.06 a gallon when adjusted for inflation.

Today the average gasoline price in the US stands at $3.61, according to AAA, or about 75 per cent higher, though this doesn’t account for the cost of the cigarettes you were more likely to smoke back then.

The average US car is also more efficient these days — getting roughly 35 miles per gallon today versus 25 miles a gallon in the 80s.

The fixed point of the calculation is the journey distance of 720 miles from the airport in Wichita, Kansas to Kenilworth, Illinois.

The result?

In 1987 Martin would have faced an inflation-adjusted $59 gasoline bill to make it home in time for Turkey day, if, of course, he’d actually managed to drive it. Today? Closer to $74. But heartwarming Thanksgiving lessons? Still priceless.

Happy holidays.

Power Points

  • The EU’s proposed cap on gas prices has been labelled “a joke non-cap” after coming under fire from critics who say it is unlikely to ever be used.

  • Bloomberg oil strategist Julian Lee writes on the biggest importer of Russian oil that doesn’t have a back-up plan for sanctions on the country’s oil.

Energy Source is a twice-weekly energy newsletter from the Financial Times. It is written and edited by Derek Brower, Myles McCormick, Justin Jacobs, Amanda Chu and Emily Goldberg.

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