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A potential price cap on Russian oil is gaining traction among the G7.
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An unnamed U.S. official has written that international oil prices could climb higher if major economies cannot agree on a cap on Russian crude.
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Analysts have warned against the oil price cap because there is no guarantee Russia will accept the terms
Failure to agree on a price cap for Russian oil will push international prices higher, a U.S. government official has warned, adding that the cap would need to be accompanied by sanction exemptions.
In a report quoting the unnamed official, Reuters wrote that the idea of the price cap was to set a price for Russian oil that covers the marginal costs of its production as a way of motivating Russia to continue exporting that oil, even at much lower than international prices.
Failure to do so means that sanctions on Russian crude oil will significantly curb its exports, which would in turn lead to a price spike, the official said, foreseeing prices of $140 per barrel.
G7 leaders discussed the price cap at its meeting in June, where it concluded that for the idea to be successful, its authors would need to get big importers such as China and India on board. So far, there has been little indication that either India or China would be willing to join the price cap.
Meanwhile, discussions are ongoing about the actual level of the cap. According to the U.S. official that Reuters spoke to this week, Japan had been concerned about setting the cap too low but had agreed to consider a range between $40 and $60 per barrel.
U.S. Treasury Secretary Janet Yellen is traveling to Asia this week, where she will try to garner support for the price cap idea among local importers. China is notably absent from her itinerary.
Analysts have warned that the oil price cap idea is not the most brilliant one because there is no guarantee Russia will accept the cap and continue business as usual. On the contrary, there is concern it would retaliate by slashing oil exports, which would push international prices much higher.
NB: Irina Slav wrote this article for Oilprice.com
