Oil tanker Sun Arrows loads its cargo of liquefied natural gas from the Sakhalin-2 project in the port of Prigorodnoye, Russia, October 29, 2021. | Photo credit: AP
The story so far: Japan has been buying oil from Russia at a price above the $60-a-barrel cap imposed by the West, according to reports this week. This has led to speculation that Japan could violate an agreement reached last year to cap the price of Russian oil.
Why is there a Russian oil price cap?
The G-7 countries, the EU and Australia imposed a price cap of $60 a barrel on oil purchased from Russia starting in December. The move was part of broader economic sanctions imposed by the West to punish Russia after its invasion of Ukraine. The West wants to limit the amount of money Russia can make by selling its oil, but without seriously affecting the world’s oil supply. Given that Russia contributes around 10% of the world’s oil supply, any significant reduction in Russian oil supplies could drive up oil prices. It is estimated that it costs Russia around $20 to $45 to produce a barrel of oil. So the West thinks that at $60 a barrel, Russia would still keep its oil production stable.
Why is Japan breaking ranks with the West?
In the first two months of the year, Japan bought around 750,000 barrels of oil from Russia at a price of around $70 a barrel. Japan’s oil imports contribute very little to Russia’s overall oil production, which was around 10.7 million barrels a day last year, and therefore do not significantly undermine Western efforts. to restrict the Kremlin’s oil revenues. However, Japan’s decision to buy oil above the price cap once again highlights the strong incentives that countries face to reverse the West’s $60 a barrel price cap. It should also be noted that even when the price cap was first imposed last December, Japan was granted an exception to buy Russian oil from Sakhalin-2 in the Russian Far East to protect its energy security.
Will other countries follow Japan?
Japan is not alone in undermining the $60 price cap imposed by the West on Russian oil. Countries like India, for example, would pay over $60 a barrel to buy oil from Russia. As oil prices rise, the chances of a divide developing even among signatories to the oil price cap agreement increase. When buyers are willing to pay upwards of $60 a barrel for supplies, oil traders are likely to be happy to overturn sanctions and deliver supplies from Russia. Critics of the oil price cap had warned that implementing the price cap could be difficult because it goes against strong economic incentives and because it may be impossible to track all shipments in an oil market. so vast and opaque.
Will rising oil prices threaten the West’s price ceiling?
On Monday, OPEC and Russia decided to cut oil production by 3.66 million barrels per day, pushing oil prices up 6%. Russian Urals, the flagship crude oil sold by Russia, also climbed above $60 a barrel, topping the West’s price ceiling. When the West first imposed its price cap, it had no effect on Russia’s oil production or revenues, as the Russian Ural was trading well below $60 a barrel. But now that the Urals are trading above $60 a barrel, things could turn out to be different. The West hopes its price cap will keep Russia’s oil revenues in check despite rising oil prices. Russia, which has seen its oil revenue plummet due to low oil prices and the West’s ban on Russian oil, hopes to turn the page by circumventing Western sanctions and selling oil above the mark. price cap. This will test the West’s ability to effectively implement its price cap.