DiXi Group Alert. Lowering the Price Cap on Russian Oil and Oil Products: Awaiting New Restrictions
As of September 2024, despite the G7+ coalition’s implementation of price caps on Russian oil and oil product exports to third countries, Russia’s budget continues to suffer significant losses, though its revenues remain substantial. The ideal outcome of the price cap would be a stable market where Russia continues to supply sufficient oil and oil products, but at the lowest possible price.
Politicians, experts, and analysts are engaged in ongoing debates regarding the optimal price cap for Russian oil. On one hand, there is a clear need to set a minimum price equal to the average production cost. On the other hand, drastic price restrictions could provoke a negative market reaction, causing a sharp rise in prices that could undermine the energy security of importing countries.
Proposals to reduce the price cap on Russian oil range from $30 to $50 per barrel. Supporters of a $30/barrel minimum argue that the average cost of Russian oil production is around $10-15/barrel, meaning that even at this low price, Russia would still have an incentive to continue exports, as oil revenues are crucial to its budget. However, Russia has a history of acting irrationally, sometimes making decisions that harm itself but also inflict maximum damage on other market players. Therefore, any new price caps must consider the risk that the Kremlin might sharply reduce exports, even at the cost of its own interests.
Based on quantitative analysis by Uppsala University, which models potential market outcomes from different levels of reduced price caps, the following conclusions can be drawn:
- Global oil consumers, including India and China, would benefit from a lower price cap, down to $30/barrel.
- Russia would suffer the most from reduced revenue due to a lower price cap.
Given this analysis and expert recommendations, the best course of action for the coalition countries would be a phased reduction of the price cap. This would reduce the Kremlin’s revenues while maintaining global market balance.
The steps could be as follows:
Step 1 – Set the price cap at $50/barrel, leading to further financial losses for Russia.
Step 2 – Lower the cap to $40/barrel if no market imbalance occurs within six months of implementing the first step.
Step 3 – Set the final cap at $30/barrel, with the goal of maximizing Russia’s financial losses while covering production costs and ensuring continued export at sufficient levels on the global market.
However, even the most decisive price cap reductions will only effectively cut Russia’s oil revenues if accompanied by stricter enforcement of the sanctions regime, including blocking “shadow fleet” vessels and properly penalizing violators and other actors aiding in sanction evasion.
The publication was prepared by DIXI GROUP with the support of the International Renaissance Foundation as part of the project «Improving Energy Security for Tomorrow». The document reflects the views of the authors and does not necessarily reflect the views of the International Renaissance Foundation.