The Biden administration plans to cap the price of Russian oil to fight inflation

The Biden administration plans to implement the first phase of a cap on Russian oil exports this fall in coordination with the G7, with the aim of involving other Asian partners in the winter.

“We are trying to prevent a rise in global energy prices by avoiding a situation where Russian production stops and we see a subsequent rise in the price,” Ben Harris, Deputy Treasury Secretary for Economic Policy, told Yahoo Finance.

The United States has been in detailed talks with G7 partners on setting a price cap in an effort to reduce Russia’s revenues to fight Ukraine and ensure oil can continue flowing into the global market, preventing a rise. global oil prices and potentially curbing inflation at home and abroad.

Barclays estimates that if most of Russia’s shipping exports were stopped, oil prices could hit $ 200 a barrel.

Over the past few weeks, the price of oil has fallen sharply, from over $ 120 a barrel at the start to under $ 88 as of Tuesday morning. Meanwhile, retail gas prices fell more than 20%, from north of $ 5 a gallon nationwide in mid-June to $ 3.95 a gallon as of Monday, according to AAA data.

Data from last week showed that consumer prices remained unchanged from June to July, with energy prices down 7.7% on a monthly basis. On an annual basis, consumer prices in July were 8.5% higher than the previous year period.

US President Joe Biden calls for an exemption from the federal gas tax as he talks about gas prices during remarks in the South Court Auditorium of the Eisenhower Executive Office Building at the White House in Washington, USA, June 22, 2022. REUTERS / Kevin Lamarque

The proposed maximum price would be accompanied by Europe’s sixth sanctions package, which would impose a total ban on European imports of Russian oil. This package will also impose a ban on financial services for countries that import all Russian crude oil and all Russian refined products delivered by sea.

Britain is expected to join the EU in banning the insurance and reinsurance of ships carrying Russian oil. The ships that Russia uses to export its oil are often owned by Western companies, while the commercial financing that many importers around the world use to import Russian oil is done through Western banks.

A ban on Russian oil and necessary transportation services would essentially prevent Russia from exporting much of its oil, potentially blocking much of Russian production, creating a potentially dramatic increase in the global oil price.

“This is quite unprecedented,” Harris said. “But I think most analysts agree that if you saw a large share of Russian production shut down, you would see a similar increase in the global oil price.”

“Our incentives are aligned”

The United States has historically moved in tandem with the European Union when it implemented sanctions. Before implementing the price cap, the US is expected to adopt complementary sanctions this fall before December 5, when the sixth G7 sanctions package against Russia comes into effect.

A Treasury official says a price cap keeps EU sanctions in place, but allows countries to use Western services needed for trade if the price of oil is below a certain level, thus keeping the flow of Russian oil on the market. Treasury officials see the maximum price as a sort of relief valve for the sixth package of sanctions, which otherwise bans world trade in Russian oil using European or British services.

Without a price cap, after Europe’s sixth sanctions package was put in place, anyone who trades in Russian oil would violate European sanctions, regardless of the price.

While discussions within the G7 are in the final stages of execution, talks with Asia are in the very first innings with the United States conducting information and education sessions with Asian countries, describing the price cap objectives, such as it could work and listening to their concerns.

A Treasury official told Yahoo Finance that the administration is not yet at the negotiation level, but that Asian officials have been eager to understand the US target with a price cap.

Treasury officials explained that a price cap would be in the interest of China and India, which have an economic incentive to import oil as cheaply as possible. As a Treasury official put it, “This is a case where our incentives are aligned.”

The administration also believes that a cap on the export price of Russian oil will be in the interest of Asian countries as the G7 has a great influence on the oil trade as most of the oil traded is carried out on Western vessels with funding. western and western insurance companies. If countries want to buy Russian oil, they typically require Western funding to do so, and to get it they should adhere to the oil price cap, according to the Treasury.

“It is really in everyone’s interest but Russia to have a price limit and have the opportunity to buy oil cheaply. Not only for the major G7 countries, but also for the lower income countries that have suffered from rising energy prices, “said Harris.” This is a real opportunity to provide some price stability to them too “.

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