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Biden administration plans Russian oil price caps to fight inflation

The Biden administration expects to implement the first phase of a price cap on Russian oil exports this fall in coordination with the G7, with sights set on bringing additional Asian partners on board in the winter.

“We're trying to prevent a spike in global energy prices by avoiding a situation where Russia production just shuts down, and you see a subsequent spike in the price,” Assistant Treasury Secretary for Economic Policy, Ben Harris, told Yahoo Finance.

The U.S. has been in detailed talks with G7 partners about setting a price cap in an effort to reduce Russia’s revenue to fight Ukraine and ensure oil can keep flowing to the global market, preventing a spike in global oil prices and potentially keeping a lid on inflation at home and abroad.

Barclays estimates if most of Russia’s sea-borne exports are disrupted, oil prices could go to $200 a barrel.

In recent weeks, the price of oil has declined sharply, falling from above $120 a barrel in early to below $88 as of Tuesday morning. Meanwhile, retail gas prices have dropped more than 20%, from north of $5 a gallon nationally in mid-June to $3.95 a gallon as of Monday, according to AAA data.

Data out last week showed consumer prices were unchanged from June to July, with energy prices dropping 7.7% month-on-month. On an annual basis, consumer prices in July were 8.5% higher than the prior year period.

U.S. President Joe Biden calls for a federal gas tax holiday as he speaks about gas prices during remarks in the Eisenhower Executive Office Building's South Court Auditorium at the White House in Washington, U.S., June 22, 2022. REUTERS/Kevin Lamarque
U.S. President Joe Biden calls for a federal gas tax holiday as he speaks about gas prices during remarks in the Eisenhower Executive Office Building's South Court Auditorium at the White House in Washington, U.S., June 22, 2022. REUTERS/Kevin Lamarque (Kevin Lamarque / reuters)

The proposed price cap would come along with Europe’s sixth sanctions package, which would impose a complete ban on European imports of Russian oil. This package will also impose a ban on financial services for countries importing all Russian crude oil and all Russian refined products delivered by sea.

Britain is expected to join the EU in banning the insurance and re-insurance of ships carrying Russian oil. The ships Russia uses to export its oil are often owned by Western companies, while the trade finance that many importers around the world use to import Russian oil are done through Western banks.

Banning Russian oil and services needed to transport would essentially stop Russia from exporting a large portion of its oil, potentially shutting in a lot of Russian production, creating a potentially dramatic spike in the price of global oil.

“This is fairly unprecedented,” said Harris. “But I think most analysts agree that if you saw a large share of Russian production shut in, you’d see a similar spike in in the global price of oil.”

'Our incentives are aligned'

The United States has historically moved in tandem with the European Union when they implement sanctions. Ahead of implementing the price cap, the U.S. is set to adopt complementary sanctions this fall before December 5, when the G7’s sixth sanctions package against Russia goes into effect.

A Treasury official says 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. Treasury officials think of the price cap as a kind of a release valve for the sixth sanctions package, which otherwise prohibits worldwide trade of Russian oil using European or UK services.

Without a price cap, after Europe’s sixth sanction package is put in place, anyone trading any Russian oil would be in violation of European sanctions, regardless of price.

While discussions within the G7 are in the final stages of being executed, talks with Asia are in the very early innings with the U.S. doing informational, educational sessions with Asian countries, describing the objectives of the price cap, how it could work, and listening to their concerns.

A Treasury official tells Yahoo Finance the administration isn’t to the negotiation level quite yet, but that Asian officials have been eager to understand the U.S.’ goal with a price cap.

Treasury officials explained a price cap would be in the interest of China and India, which have an economic incentive to import oil as cheaply as possible. As one Treasury official put it, "This is a case where our incentives are aligned."

The administration also believes a Russian oil export price cap will be in Asian countries’ interests since the G7 has a large influence over the trade of oil given that most oil traded is carried out on Western ships under Western finance and Western insurance. If countries want to buy Russian oil they typically require Western financing to do that and in order to get that they would have to adhere to the oil price cap, according to Treasury.

“It's really in the interests of everyone but Russia to have a price cap and to have an opportunity to buy cheap oil. Not just for the major G7 countries but also for lower income countries that have been suffering from higher energy prices,” said Harris. “This is a real opportunity to provide some price stability to them as well.”

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