The global oil market entered largely uncharted territory this week after a price cap on Russian crude oil kicked in on Monday, the result of months of tense negotiations and diplomatic wrangling among divided Western nations.
The measure, which would cap the price of seaborne Russian crude oil at $60 per barrel, is supposed to deprive the Kremlin of critical revenue. It took effect the same day as a sweeping European Union sanctions package that largely bans Russian crude oil imports and prohibits companies in the bloc from offering crucial maritime services, like insurance, to tankers transporting Russian oil—except if it falls under the cap.
The $60 per barrel amount drew criticism from Ukrainian President Volodymyr Zelensky, who had pushed for a lower ceiling to fully starve the Kremlin’s war effort. Officials were “trying to avoid hard decisions,” he said.
In setting the price cap, experts say negotiators were trying to reconcile two contradictory demands: Deprive Russia of its oil revenue, while simultaneously keeping Russian oil on the market to shield their own economies from further pain. Officials were worried about the potential economic shock of the E.U. sanctions, experts said, and set the price cap to help mitigate any disruptions.
“We’re seeing Western governments try and maintain the volume of oil, but limit or reduce the revenue,” said Richard Bronze, the co-founder of Energy Aspects, who described it as a “really difficult balancing act.”
Raad Alkadiri, an energy expert at Eurasia Group, put it more bluntly. “It’s an effort by industrialized countries to have their cake and eat it too,” he said.
What that will look like in practice is still unclear, and will likely be very messy. Under the policy, the onus would be on initial buyers and companies to prove that they have complied with the price cap, raising questions about potential forgeries and falsified documentation.
Russia, for its part, has insisted that it will “not accept” the cap and has rejected doing business with other nations who observe it. Moscow has also rounded up a fleet of “shadow” tankers to bypass the new constraints, the Financial Times reported, further complicating enforcement methods. Elisabeth Braw wrote for FP last month on this “ghost fleet” and how certain EU companies had, prior to this week, helped Russia bypass sanctions.
“This is new territory,” said Bronze. “That’s just adding some uncertainty in terms of how it’s going to play out, certainly through the next few months, until we get some practical evidence of the enforcement approach.”