India must tread with care the oil price cap maze

Calling it an ‘absurd decision’ leading to chaos, Russia warned that countries imposing a price cap would be banned from receiving Russian oil.

Published: 10th September 2022 08:06 AM  |   Last Updated: 10th September 2022 08:16 AM   |  A+A-

Crude oil

Image used for representational purpose only. (Photo | AFP)

The G-7 wealthy nations have proposed a price cap on Russian oil exports to deplete Moscow’s war chest financing the Ukraine war. The details are thin, but the EU’s sixth sanctions package is inching closer to banning all Russian crude oil imports by sea into the bloc starting December 5 and all refined oil products like gasoline and diesel from February 5, 2023.

Russian oil imports by road and other means will continue, but at discounted prices, limiting Moscow’s profit margin on each barrel sold. The price cap level isn’t finalised yet, but most expect a range above production costs to ensure export incentives. No producer can entirely stop pumping oil, as oil wells don’t work with a simple, mechanical stop-start function. Some also fear the move could lead to supply shocks and skyrocketing prices in global markets, earning more revenue for Russia even if export volumes drop.

Calling it an ‘absurd decision’ leading to chaos, Russia warned that countries imposing a price cap would be banned from receiving Russian oil. Moreover, energy experts say a price cap that’s not global will never work and warn that the plan could backfire if key buyers like China, India and Turkey stay away. India maintains that Europeans buy more in one afternoon than Asia’s third-largest economy does in a quarter.

Still, the EU has called on China and India to join forces, while the US is pressurising India to join the buyer’s cartel. On the other hand, a desperate Russia is luring nations with juicier long-term and fixed price contracts at deep discounts to lock in future revenue. This is favourable to nonparticipating countries, whose goal is to get the lowest price. With ports and shipping lanes off-limits, Russian oil exports will face logistical delays, and the proposed price cap gives oil-buying nations additional leverage to negotiate.

There has never been an attempt to impose an oil price cap, though there were oil export sanctions on nations like Iran and Venezuela. In either scenario, Russia may have to give up pricing power over energy exports. The G-7 is reminding India about its conflicting interests in boycotting Moscow. Still, Minister of Petroleum and Natural Gas Hardeep Singh Puri was explicit that his ‘moral duty’ was only towards his fellow citizens. While securing affordable energy is essential to tame inflation, India must carefully assess its strategic position and take a nuanced decision.



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