People lay flowers to commemorate Chris Parry and Andrew Bagshaw, two British volunteers killed in eastern Ukraine, during a commemorating service in a refectory near St. Sophia Cathedral in Kyiv, Ukraine. Photo / AP
Europe has imposed a ban on Russian diesel fuel and other refined oil products, slashing energy dependency on Moscow and seeking to further crimp the Kremlin’s fossil fuel earnings as punishment for invading Ukraine.
The ban comes along with a price cap agreed by the Group of Seven allied democracies.
The goal is allowing Russian diesel to keep flowing to countries like China and India and avoiding a sudden price rise that would hurt consumers worldwide, while reducing the profits funding Moscow’s budget and war.
Diesel is key for the economy because it is used to power cars, trucks carrying goods, farm equipment and factory machinery.
Diesel prices have been elevated due to recovering demand after the Covid-19 pandemic and limits on refining capacity, contributing to inflation for other goods worldwide.
The new sanctions create uncertainty about prices as the 27-nation European Union finds new supplies of diesel from the US, Middle East and India to replace those from Russia, which at one point delivered 10 per cent of Europe’s total diesel needs.
Those are longer journeys than from Russia’s ports, stretching available tankers.
Prices also could be driven up by reviving demand from China as the economy rebounds after the end of draconian Covid-19 restrictions.
The price cap of $100 (NZ$158) per barrel for diesel, jet fuel and gasoline is to be enforced by barring insurance and shipping services from handling diesel priced over the limit.
Most of those companies are located in Western countries.
It follows a $60-per-barrel cap on Russian crude that took effect in December and is supposed to work the same way. Both the diesel and oil caps could be tightened later.
“Once we have these price caps set, we can squeeze the Russian price and deny them, deny (President Vladimir) Putin money for his war without a price spike that’s going to hurt Western economies and developing economies,” said Thomas O’Donnell, a global fellow with the Washington-based Wilson Center.
The diesel price cap will not bite immediately because it was set at about what Russian diesel trades for. Russia’s chief problem now will be finding new customers, not evading the price ceiling. However, the cap aims to prevent Russian gains from any sudden price spikes in refined oil products.
Analysts say there might be a price bump initially as markets sort out the changes. But they say the embargo should not cause a price spike if the cap works as intended and Russian diesel keeps flowing to other countries.
Diesel fuel at the pump has been flat since the start of December, costing €1.80 (NZ$3.08) per litre as of January 30, according to the weekly oil market report issued by the European Union’s executive commission.
Pump prices in Germany, the EU’s largest economy, fell 2.6 cents to €1.83 euros per litre as of January 31.
The ban provides for a 55-day grace period for diesel loaded on tankers before Sunday, a step aimed at avoiding ruffling markets.
European Union officials say importers have had time to adjust since the ban was announced in June.
Russia earned more than $2 billion from diesel sales to Europe in December alone as importers appear to have stocked up with added purchases ahead of the ban.
Europe has already banned Russian coal and most crude oil, while Moscow has cut off most shipments of natural gas.
Western governments have agreed to cap the price of Russia’s oil exports in an attempt to limit the fossil fuel earnings that support Moscow’s budget, its military and the invasion of Ukraine.
The cap is set to take effect Monday, the same day the European Union will impose a boycott on most Russian oil — its crude that is shipped by sea. The EU reached a deal for a $60-per-barrel threshold Friday, and the Group of Seven nations and Australia signed off on the deal later in the day.
The twin measures could have an uncertain effect on the price of oil as worries over lost supply through the boycott compete with fears about lower demand from a slowing global economy.
Here is what to know about the price cap, the EU embargo and what they could mean for consumers and the global economy:
What is the price cap and how would it work?
US Treasury Secretary Janet Yellen has proposed the cap with other Group of 7 allies as a way to limit Russia’s earnings while keeping Russian oil flowing to the global economy. The aim: hurt Moscow’s finances while avoiding a sharp oil price spike if Russia’s oil is suddenly taken off the global market.
Insurance companies and other firms needed to ship oil would only be able to deal with Russian crude if the oil is priced at or below the cap. Most insurers are located in the EU or the United Kingdom and could be required to participate in the cap.
How will oil keep flowing to the global economy?
Universal enforcement of the insurance ban, imposed by the EU and UK in earlier rounds of sanctions, could take so much Russian crude off the market that oil prices would spike, Western economies would suffer, and Russia would see increased earnings from whatever oil it can ship in defiance of the embargo.
Russia, the world’s No. 2 oil producer, has already rerouted much of its supply to India, China and other Asian countries at discounted prices after Western customers shunned it even before the EU ban.
What effect would different cap levels have?
A $60 cap will not have much impact on Russia’s finances, said Simone Tagliapietra, an energy policy expert at the Bruegel think tank in Brussels.
That “will almost go unnoticed,” he said, because it would be near where Russian oil is already selling.
Russian Urals blend sells at a significant discount to international benchmark Brent and fell below $60 for the first time in months this week on fears of reduced demand from China due to outbreaks of Covid-19.
“Up front, the cap is not a satisfying number,” Tagliapietra said, but it could prevent the Kremlin from profiting if oil prices suddenly shoot higher and the cap bites.
“The cap might be lowered over time if we want to increase the pressure on Russian President Vladimir Putin,” he said. “The problem is: We have already spent a lot of months waiting for a measure to dent” Putin’s oil profits.
If the cap had been as low as $50, it would cut into Russia’s earnings and make it impossible for Russia to balance its state budget, with Moscow believed to require around $60 to $70 per barrel to do that, its so-called “fiscal break-even.”
However, a $50 cap would still have been above Russia’s cost of production of between $30 and $40 per barrel, giving Moscow an incentive to keep selling oil simply to avoid having to cap wells that can be hard to restart.
Robin Brooks, chief economist at the Institute for International Finance in Washington, tweeted last week that a $30 cap would “give Russia the financial crisis it deserves.”
The wrangling over where to set the cap highlighted the disagreement on which goal to pursue: hurting Russia’s finances or taming inflation, with the U.S. coming down on the side of controlling price increases, said Maria Shagina, a sanctions expert at the International Institute for Strategic Studies in Berlin.
With Monday’s deadline looming, she said that “$60 is better than not agreeing at all. They can obviously revise it later on to reflect conditions on the market ... and tighten it.”
What if Russia and other countries won’t go along?
Russia has said it will not observe a cap and will halt deliveries to countries that do.
Russia could retaliate by shutting off shipments in hopes of profiting from a sharply higher global oil price on whatever it can sell around the sanctions.
Buyers in China and India might not go along with the cap, while Russia or China could try to set up their own insurance providers to replace those barred by the US, UK, and Europe.
Russia also could sell oil off the books by using “dark fleet” tankers with obscure ownership, as have Venezuela and Iran. Oil could be transferred from one ship to another and mixed with oil of similar quality to disguise its origin.
Even under those circumstances, the cap would make it “more costly, time-consuming and cumbersome” for Russia to sell oil around the restrictions, Shagina said.
The greater distances involved in shipping oil to Asia means up to four times more tanker capacity is needed, and not everyone will take Russian insurance.
“You need to tap into this dark fleet, and it’s not limitless,” she said.
“Iran and Venezuela are using it, rather effectively, but you might face competition with the same targets. ... This cat-and-mouse game is always inherent in sanctions mechanisms.”
What about the EU embargo?
Russian producers likely won’t be able to reroute all their oil from Europe, formerly their biggest customer, and some will likely be lost to the global market — at least at first.
Analysts at Commerzbank say the EU embargo and cap together could result in “a noticeable tightening on the oil market in early 2023″ and expect the price of international benchmark Brent to climb back to $95 per barrel in coming weeks.
On Friday, Brent slid to $85.48 a barrel.
Europe still has many cars that run on diesel. The fuel also is used for truck transport to get a huge range of goods to consumers and to run agricultural machinery — so those higher costs will be spread throughout the economy.
Written by: David McHugh, AP. Associated Press writer Jeffrey Schaeffer contributed from Paris.
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