Price Cap on Russian Oil to Lead to Increase in Global Energy Costs

January 18, 2023

The Roscongress Foundation has prepared an analytical article entitled ‘The Paradox: How Oil Price Caps Lead to Increase’ about the Russian oil price cap mechanism introduced in December 2022 by the G7, European Union, and Australia. The authors of the article believe the restrictions will have the unexpected result of leading to an increase in the price of oil on the international market, including Western benchmarks, instead of causing a significant reduction to Moscow’s revenues from the sale of energy resources, the original hope of the project’s initiators.

Experts point to the effective countermeasures Russia has already put in place. These include trade restrictions for countries that supported the price cap, new logistical and technological solutions in the supply of raw materials, and a flexible pricing policy for strategic partners. As a consequence, Russian oil exports to Asia have tripled to 2.5 million barrels since February 2022, with Saudi Arabia increasing its oil exports to Europe by 17% over the year. Saudi Arabia and Russia would appear to be in the process of changing places, as Moscow uses aggressive discounts to increase its share in Asia, and Riyadh occupies the empty space left in Europe with its own flexible system of discounts. On the whole, the process seems to work in the interest of both sides, the authors of the article conclude, as evidenced by the agreed upon OPEC+ production cuts not having led to internal conflict.

At the same time, the International Energy Agency (IEA) has revised its forecast for global oil demand, calling for upward movement by 2.3 million barrels per day in 2022 and another 1.7 million barrels in 2023. Growing consumption in Asia has caused the global oil shortage to supplant the price cap in importance. A slight shortage of 100–200 thousand barrels per day will become apparent by March 2023. By September-October, the shortage will have grown to more than 2 million barrels per day and unavoidable price increases.

The Foundation’s analysts project Brent oil will reach a maximum of USD 100–105 per barrel in 2023, with prices for Russian Urals expected to grow proportionally.

The article has been published on the Roscongress Foundation’s Dzen channel

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