G7 to impose a price cap on Russian crude oil.
Soon, a “price cap” will be imposed on Russian crude oil. It means that Russia cannot sell crude oil at its own prices. This can be understood through an example; For instance, if the international market price of crude oil is 100, then it is expected that the G7 countries will impose restrictions on Russia due to which Russia can not sell beyond the price charged on crude oil by the G7 countries.
Recently, a G7 meeting was conducted, which was held in Germany. Prime Minister Narendra Modi went to Germany to attend the meeting. In this meeting, a deal was tried to strike by the leaders under which a cap shall be imposed on the price of Russian oil so that Russia could not charge higher costs on crude oil. When a “price cap” is set on Russian crude oil, Russia’s revenue will be adversely affected.
The group of 7 (G7) is an informal forum of the seven most powerful economies of the world, including Canada, the United States, the United Kingdom, France, Germany, Italy, and Japan. The measures taken by these most powerful countries have a massive impact on the globe. Whenever European Unions (EU) are invited as representatives, the hosting nation encourages other countries like India, Argentina, and South Africa.
To analyze the whole topic, it is first essential to understand the importance of Russian crude oil. Russia is among the three top oil producers in the world, followed by the United States and Saudi Arabia. Every day Russia produces around 11 million barrels of crude oil, among which half is consumed domestically, and exports around 5 million to 6 million per day. In 2021 Russia had 110 billion dollars of revenue from oil exports. This implies that Russia’s revenue is highly dependent on oil exports. Hence, the Russian economy will hit hard due to the “price cap” decision.
Europe is one-third dependent on Russian imports for crude oil. Even the US is also reliant on Russia for crude oil. Although the US produces in large quantities, it consumes the oil domestically. The rest is sourced from Medical, Egypt, and Saudi Arabia. Two-thirds of Russian supply is exported to industrialized nations, including Europe, North America, and Asia. While China is another big buyer, it imports 1.6 million barrels daily. Around 20% of Russia’s imports are intended for China.
Why Price Cap?
Since the invasion of Ukraine, the United state and its allies decided to ban Russia. A Lot of sanctions have been imposed on Russia. Canada is the first G7 nation to ban Russian oil. The impact of banning crude oil by Canada did not have a big impact became the oil dependency of Canada on Russia was not that much. Canada’s ban will not impact its consumption, because of which Canada had banned Russian crude oil. The United States on 8th March also banned Russian oil. The European Union has decided to ban it in a phased manner. And nearly at the end of 2022, oil will be entirely prohibited.
Countries like India and China are still importing crude oil from Russia. Although a lot of criticism is faced by India because when other nations banned Russian oil, India and China are importing on a large scale.
The aim behind banning Russian crude is to lower Russia’s power by directly attaching on its revenue. But no such effect of banning is seen in Russia even after these massive measures. So the United States and its allies are now trying to attack Russia’s revenue and power through a “price cap” policy on Russian crude oil.
How does the price Cap work?
Although Russia exports on a large scale for shipping and insurance, it is dependent on Europe. So here, for instance, Europe will force India not to buy Crude oil from Russia for more than 50 dollars per barrel (just for reference). If India imports for more than 50 dollars, then the shipping and insurance mechanism will not be provided by Europe.
In other words, the European scheme would limit the availability of shipping and insurance services that enable worldwide transport of Russian oil under the price capping scheme. Along with this, US financial services will also get restricted. Around 95 percent of the oil tanker fleet is covered by the International Group of Protection and Indemnity club in London.
Impact on India
India imports crude oil from Russia on a vast scale. Russia is India’s second-largest crude oil importer, followed by Iraq. 10 percent of the total oil is imported from Russia. Prior it was just 0.2 percent. An immense contribution to this is from the private players. Because they were getting discounts as high as 30 dollars per barrel. So among the total value, 40 percent of oil is imported by private players.
If the price cap is implemented on Russian crude oil, the Indian and Chinese businesses will still continue to be in a profitable situation. When the oil price goes down, then the inflation in the Current economy can be controlled and balanced. This will also push up the GDP of our country.
On the other hand, there is a fear that due to this measure, the relationship of India with Russia will somehow get affected. So they may accept to take inferior Russian insurance rather than be told what to pay for a critical commodity, even if it will be at an attractively low price.
edited and proofread by nikita sharma