May 22, 2023

US reports on success of price cap policy

The US Department of the Treasury’s Office of Foreign Assets Control recently provided a progress report on the efficacy of the price cap policy, the goal of which is to restrict Russian oil revenues and maintain the supply of Russian oil in the global energy market.  The Price Cap Coalition – made up of G7 partners, Australia, and the EU – sought to achieve these goals by prohibiting maritime services that support the shipment of Russian oil and petroleum products that exceed the price cap levels.  In December 2022, the Coalition set the price cap for Russian crude oil at $60 per barrel and, in February 2023, the price cap for Russian petroleum products was set at $100 per barrel for petroleum products, such as diesel that trade at a premium to crude, and a $45 per barrel cap on petroleum products, such as fuel oils that trade at a discount to crude.

According to a report issued by Elizabeth Rosenberg, the Assistant Secretary for Terrorist Financing & Financial Crimes, and Eric Van Nostrand, the Active Assistant for Economic Policy, nearly six months after the cap on Russian crude oil exports was implemented, the price cap has been successful in achieving these two goals.  The report indicates that while the volume Russian oil sold has remained consistent, Russia’s oil revenues in 2023 have been more than 40 percent lower than the year before.  The price cap has also reportedly forced Russia to alter the way it taxes oil and has compelled Russian authorities to institutionalize the discounted value of Russian crude – an action that potentially threatens Russia’s capacity to produce oil in the future by reducing companies’ incentives to invest in equipment, exploration, and existing fields.  The report also indicates that low- and middle-income countries have benefited the most from the cap by not only lowing prices on Russian oil but providing these countries with leverage to demand lower prices from Russia.

The US Department of the Treasury also recently highlighted a New York Times article on the subject, which states that “the cap appears to be forcing Russia to sell it oil for less than other major producers, when crude prices are down significantly from their levels immediately after Russia’s invasion of Ukraine.”  According to Rosenberg and Nostrand’s report, immediately following the invasion of Ukraine in the spring of 2022, Russia was earning over $100 per barrel on it oil sales with prices exceeding $140 per barrel.  Since the price cap policy’s implementation, the average price of Russian crude oil has reportedly been below $60 per barrel each month.  In addition, while oil revenues accounted for 30-35 percent of the total Russian budget before the war with Ukraine, in 2023 they represent just 23 percent of the budget.

Department of Treasury Press Release | The Price Cap on Russian Oil: a Progress Report | Department of Treasury Highlights NY Times Article