Over at the G7 summit in the Bavarian Alps, Western leaders are attempting to find new ways to curb soaring energy costs, especially given the fears of an oncoming recession. The latest idea being pitched is caps on the price of Russian oil and gas, though obstacles remain, and the concept would need to garner widespread adoption to be effective.
The Kremlin has already been making some serious dough from surging prices of its commodity exports, which have helped the government weather a continuous slew of hefty sanctions.
How caps would work: Details are still being discussed, but the plan aims to cap prices at a level close to the cost of Russian production – thereby denting Moscow’s finances but still ensuring critical energy flows. To accomplish this, Europe would restrict the availability of transport and insurance services to shippers which only agree to observe the price ceiling (~95% of the world’s oil tanker fleet is covered by the International Group of P&I Clubs in London and companies based in continental Europe). Another proposal would apply similar caps on Russian gas prices, or limit the usage of U.S. financial services that could also benefit the scheme.
Complicating the matter is the fact that EU just agreed to a phased-in ban on seaborne Russian oil shipments, while temporarily allowing crude deliveries via pipeline. Any new agreement would require the bloc to reopen the legal text of its latest sanctions package, which had to overcome significant hurdles and took weeks to approve. Big buyers of Russian crude, like China and India, could also settle for a lower standard of Russian insurance on their oil shipments, while Vladimir Putin may sharply cut supplies if he felt Russia was being threatened (he already turned off some natural gas taps heading to the EU).
On the move: The price of a barrel of oil fell to nearly $100 on June 22, but has climbed around 10% over the past week and is up 50% YTD. Early Tuesday, WTI crude futures (CL1:COM) reached as high as $111.63/bbl, with the market still on edge over supply disruptions that could exacerbate the delicate energy landscape. Not helping the situation are signals that Libya could face limited supply amid a worsening political crisis, the possibility that Ecuador could halt some output due to anti-government unrest, and confirmation from the UAE and the Saudis that they are near maximum production capacity.
