From Dec. 5, the European Union will be prohibited from importing Russian crude oil. Insurance companies covering sea-born oil shipments will no longer be able to cover vessels carrying Russian crude anywhere in the world. Moscow will then face a choice: decrease production at home by capping wells or assemble vessels outside the West to offload the crude to other buyers. The sanctions could take as much as two million barrels off the global market, raising energy prices.
The G-7, working with the EU, is scrambling to finalize a fix to avoid that price surge. It has been working on a plan that would permit EU and U.K. vessels to transport Russian crude as long as the oil is bought at a certain price. Whether this gambit would work or not is less clear.
Right now, the Russians don’t have many problems getting their crude to market. According to the latest figures compiled by S&P Global Commodities, Russia exported 3.09 million barrels of crude a day by sea in October. That’s nearly the same amount exported in January and February. China and India, two economic powerhouses, scooped up much of that crude at a discount. Europe, despite its tough talk on penalizing Vladimir Putin for his war in Ukraine, continues to buy Russian oil to this very day. Russian crude shipments to the Netherlands rose 30% in October to 229,000 barrels a day. In total, Russian sea-borne crude exports to the EU increased by 7% between September and October. The Europeans, it seems, are willing to buy from the Russians to meet their energy needs until the last possible moment. Will India soon fill the gap?
In October 2021, India imported approximately 100,000 barrels of Russian oil a day. This October, that figure ballooned to 970,000 barrels — an 870% increase over a twelve-month time span. These numbers are obviously disconcerting to U.S. officials who have spent the last nine months trying to squeeze the Russian economy and cut Putin off from the revenue he needs to finance his war. But Washington seems to have begrudgingly recognized that India can’t be dissuaded from purchasing Russian oil, particularly when the Europeans are still doing so.
All eyes are now on the G-7’s price cap mechanism, which aims to establish a buyer’s cartel on Russian oil. Less than a month until the EU’s latest batch of sanctions comes into effect, there is still a lot we don’t know about how the cap works, whether countries outside the G-7 (and Australia) will participate, and what the actual cap will be. The Wall Street Journal reported last week that the cap will be set at an exact figure and continually reviewed rather than pegged to the Brent global benchmark. We know that insurance entities and vessels won’t be held responsible if the buyers and sellers attest to the price. But other than that, much remains unresolved.
On Tuesday, Brent crude closed at $95.12 a barrel. Whether that number goes up or down will depend in large part on whether the G-7 price cap works. If it doesn’t, then we could see lower supply, higher demand, and even higher gas prices at home.
Daniel DePetris (@DanDePetris) is a contributor to the Washington Examiner’s Beltway Confidential blog. His opinions are his own.