US to announce oil price cap in coming days, Treasury official says
The US on Tuesday released detailed guidelines on how to legally participate in trading or financing Russian oil, days away from announcing an official price cap, according to a senior Treasury official who reviewed the guidelines.
The US has joined forces with the G-7, European Union, and Australia to ban imports on Russian oil, part of sanctions the US and other nations have rolled out since Russia’s invasion of Ukraine. The countries have also agreed to fashion a price cap on Russian oil to keep it flowing onto the market, preventing a spike in global prices that could hurt consumers globally while also limiting Russia’s revenues.
The US guidelines align very closely with those the UK recently announced. The UK will prevent countries from using its services to transport Russian oil unless it is purchased at or below the oil price cap set by the oil price cap coalition of the G-7, EU, US, and Australia. Most Russian oil uses Western shipping and insurance out of the UK The US hopes to make offering services to trade Russian oil more seamless for purchasers and participants to avoid compliance issues with different rules in different areas of the world.
As long as Russian oil is purchased at or below the price cap, trading, financing, shipping, insurance and customs brokering will all be covered and not considered a violation of sanctions. The Russian oil import ban and new guidelines will take effect on December 5, according to the Treasury official.
The price cap will be an actual price and not a range, the official said. It is expected to be set quarterly or semi-annually, according to the official. While the actual price will be set soon, it’s expected to be above the cost of production and will take into consideration the state of the oil market and how much Russia has previously earned on oil revenues. The cost of oil production varies across different regions in Russia. The IMF estimates the full-cost breakeven price for production of Russian oil is close to $30 to $40 per barrel.
The price cap is expected in the coming days, as the EU consults among its 27 member countries and then with the US and UK
Deputy Secretary Wally Adeyemo Treasury told Yahoo Finance in September that the US would put in place the price cap by December 5, the date that a European six-sanction package, which bans the oil imports, goes into effect.
Globally, the price of oil has declined sharply in the latter half of 2022. WTI crude oil, the US benchmark price, falling over 30% from above $120 a barrel in early June to around $81 as of Tuesday. The International Energy Agency expects Russian oil output to fall to around 1.4 million barrels a day by next year.
A price cap keeps EU sanctions in place but allows countries to use Western services needed to trade if the price of oil is under a certain level, thus keeping Russian oil flowing onto the market. Officials think of the price cap Treasury as a kind of release valve for sanctions, which otherwise prohibits worldwide trade of Russian oil using European or UK services.