An impossible equation for Europe?

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The 27 failed to agree Monday on the contours of the embargo on Russian oil, which should come into force on December 5. This was to determine the price ceiling for Russian crude oil exported by sea. But no one knows where to put this tariff to dry up Russia’s oil revenues without increasing energy prices on the world market.

Russian oil continues to be a thorn in the side of the international community and especially the European Union. Thus, European countries could not limit the price of a barrel of Russian crude oil transported by tanker on Monday, November 28. While Poland and the Baltic countries were fighting for a price close to $30, most countries wanted a fairly high price – the price of a barrel of Brent oil is about $65-70.

It must be said that the twenty-seven tried their hand at a delicate balancing act: they agreed to a price low enough to hurt the flow of money from Russia, allowing Vladimir Putin to finance his war, without depriving the world market of all Russian black gold. will cause energy prices to rise dangerously.

Fear of rising oil prices

This battle for the increase of tariffs for the export of Russian oil by tankers has been going on globally for several months. Simone Tagliapietra, an expert on European energy policy issues at the Bruegel Institute, said before the summer that “Europe accepted part of the sanctions, which included an embargo on Russian oil exports.”

The scheme, which was later developed and was to take effect on December 5, involved two aspects: the suspension of the import of Russian oil to European soil and measures to make it difficult to divert its exports to China or third countries such as China. India.

It is the second part of the sanctions that forms the basis of the current struggle over the price ceiling. The Europeans initially planned to ban European insurers (among the world’s largest insurers) from insuring Russian oil tankers. Without this sesame, it would not be possible for the carrier to set sail. As a result, the valuable Russian hydrocarbon would become very rare on the world market.

A prospect that has some countries panicking as oil prices begin to rise due to OPEC’s decision to cut production. Simone Tagliapietra explains: “The G7 countries, at the initiative of the United States, proposed instead to set a ceiling on the prices at which insurers cannot insure a ship carrying Russian hydrocarbons.”

So the ban became a less bitter pill. And not only for Moscow. Washington wanted to avoid a catastrophic scenario: seeing an increased shortage of hydrocarbons due to the disappearance of Russian oil (Russia is in 2nd place)e world exporter) and energy prices are rising to such an extent that the world finds itself almost as penalized by these sanctions as Moscow.

Therefore, they were proposed by the European members of the G7 at the beginning of September with a ceiling price of between 65 and 70 dollars per barrel. At that time, Brent was sold above 80 dollars on the world market, and the American offer could be considered a real blow to Russian finances. The idea was that insurers would not be allowed to sell tankers carrying Russian crude at prices higher than the ceiling price.

G7 price ceiling, window dressing?

Besides, Poland quickly found that the offer was window dressing. Warsaw, supported by the Baltic states, recalled that Russia was already forced to sell its oil at a discounted price…about $65 per barrel. Lawrence Haar, an energy economist at the University of Brighton, points out that the G7 proposal “is unlikely to have any impact on Moscow’s oil export revenue.”

Poland, which is one of the countries that supports the application of the toughest possible sanctions against Moscow, advocates that the price of one barrel of oil should be close to 30 dollars. Warsaw reminds that the cost of production of crude oil in the Urals hardly exceeds 10 dollars per barrel.

This proposal may seem more in line with the stated goal of draining the manna that allows Vladimir Putin to finance his war in Ukraine. But “for some European countries, this risks being politically unacceptable”, emphasizes Simone Tagliapietra.

Economist Harald Oberhofer of the Austrian Institute for Economic Research (Wifo) notes that indeed, “States like Cyprus or Greece must control the interests of their maritime sector.” “They fear that ship owners will lose ships that will prefer to register in countries outside the European Union to avoid the effects of the European embargo.”

Of course, “95% of insurance underwriting for oil tankers is currently provided by G7 consortia. But how long will it take for the Chinese to start replacing it?” asks American economist Barry Eichengreen. The debate, organized in September by the Center for Economic and Policy Research (CEPR), tells Les Échos.

So the situation seems to be deadlocked. A price that is too high will have no effect on Russia’s cash flow, and if it is too low, “Moscow will find ways to circumvent sanctions,” Lawrence Haar said.

There is no good solution

Supporters of the “G7 prize” claim that this is the first step. Simone Tagliapietra explains that they explain that the most important thing is “to apply the sanctioning mechanism, even if it means lowering the ceiling price if necessary later”. It would, in fact, be a kind of sword of Damocles that the community could forever wave over the heads of the Russians. To paraphrase the famous chess theorist Aaron Nimzowitsch, “The threat is always greater than the execution,” explaining that it is often better to keep the threat on the chessboard in order to push the opponent into a foul and win the game.

Another option would be to place the ceiling price between the G7 proposal and the Polish proposal. “We can imagine a price of around $50,” emphasizes Simone Tagliapietra.

However, this does not solve the problem inherent in this mechanism. “The price cap only works if it is below market prices, and we cannot know what will happen to the oil price in three months or more,” concludes Harald Oberhofer. The whole build can quickly look like a gas plant if you have to constantly adjust the cursor following the crude course.

“The only effective way to reduce Russia’s oil revenues would be simply to prevent Russian ships from leaving port with their valuable cargo,” Lawrence Haar notes. But for that you must be able to impose such an embargo… by force if necessary, which would probably be considered an act of war by Moscow.

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