MUMBAI/LONDON (15th BREAKINGVIEWS) – A G7 plan to cap the price of Russian oil could do more harm than good to Asian powers China and India. This is true whether or not the countries join the G7 measures.
China and India will resist this measure, which limits the flow of funds into Russia by capping transaction prices. Unlike Western countries, neither country has condemned Russia’s invasion of Ukraine. On the contrary, they are taking advantage of this opportunity to increase their purchases of cheaper Ural crude oil from Russia. While North Sea Brent oil is currently trading at around $94 a barrel, Ural crude is about 20% cheaper. Russian President Vladimir Putin met with Chinese President Xi Jinping on the 15th and Indian Prime Minister Narendra Modi on the 16th.
There are certainly ways for China and India to benefit in the short term. Senior U.S. Treasury officials have argued that even non-participating nations can use the measure to negotiate bigger price cuts with Russia. That may be especially the case if Putin takes countermeasures by restricting supplies to G7 countries and, as a result, needs an alternative market to the G7.
However, the US scenario of “everyone wins except Russia” is too simplistic. Any entity that buys Russian oil at prices above the cap will have to accept Western stranglehold on key parts of the logistics chain.
About 60% of the vessels carrying Russian crude oil are flagged in Greece and other European Union (EU) vessels, most of which are insured by Norwegian or British insurers. This is known from research conducted by the Research Center. Adherence to price caps is a condition for receiving services from G7 countries and others that join the measures. If Putin cuts oil supplies as well as natural gas, international oil prices could end up rising and not all countries will benefit in the short term.
On the other hand, there are also long-term costs. A price cap would prevent markets from sending reliable signals, making it harder for producers to make capital investment decisions for future supply. In the 2000s, rising oil prices prompted a shale oil development boom in the United States.
Today, these signals are most relevant in Asian countries. The Organization of the Petroleum Exporting Countries (OPEC) expects U.S. and European oil demand to fall by 6 million barrels per day by 2045. By contrast, demand from India and China could rise by 10.3 million bpd, contributing nearly 60% of global demand growth.
Long-term supply relationships will become more important as the transition to renewable energy accelerates and investment in oil extraction becomes less attractive. For Asia, a price cap doesn’t make sense in the long run, and may not be of much benefit in the short term either.
— US Assistant Secretary of the Treasury Ben Harris told reporters on Thursday that the G7 countries’ plan to cap the price of Russian oil would help India further lower the price of oil purchases. “Each country could choose not to formally participate in the price cap, and could use the newly born ‘lever’ to gain an advantage in negotiations to purchase Russian oil. “We have already seen reports that they are seeking a contract because Russia is afraid of the price cap,” he said. Harris said he expects the system to “win virtually everyone except Russia.”
* The Indian newspaper Business Standard dated 11th said, “Artificial changes to the well-established international pricing mechanism may have unintended consequences later on. India will continue to consider multiple options.” A high-ranking government official said,
(The author is a columnist for Reuters Breakingviews. This column is based on the author’s personal opinion.)