Column: Peaking Russian oil prices, more harm than good for China and India | Reuters

MUMBAI/LONDON (15th BREAKINGVIEWS) – A G7 plan to cap the price of Russian oil could do more harm than good for Asian powerhouses China and India. This is true whether or not countries join the G7 measures.

BEIJING (Reuters) – A Group of Seven (G7) plan to cap the price of Russian oil could do more harm than good for Asian powers China and India on September 15. Pictured is a tanker at the port of Nakhodka, Russia. (Reuters/Tatiana Meel)

China and India will resist this measure, which limits the flow of funds to Russia by capping transaction prices. Unlike the West, neither country condemned Russia’s invasion of Ukraine. On the contrary, they are using this opportunity to increase their purchases of cheaper Urals crude oil from Russia. While Brent oil from the North Sea is currently trading at around $94 a barrel, Urals crude is around 20% cheaper. Russian President Vladimir Putin met Chinese President Xi Jinping on the 15th and Indian Prime Minister Narendra Modi on the 16th.

There are certainly ways for China and India to take advantage of this in the short term. Senior US Treasury officials have argued that even non-participating countries can use the measure to negotiate deeper price cuts with Russia. This may be especially the case if Putin takes countermeasures by limiting supplies to G7 countries and therefore needs an alternative market to the G7.

However, the American “everyone wins but Russia” scenario is too simplistic. Any entity that buys Russian oil at prices above the cap will have to accept Western control over key parts of the supply chain.

About 60% of ships carrying Russian crude oil are under the Greek flag and other European Union (EU) ships, most of which are insured by Norwegian or British insurers, as shown by research carried out by the Center for research. Compliance with price caps is a condition for receiving services from G7 countries and others joining the measures. If Putin cuts oil supplies as well as natural gas, international oil prices could end up rising and not all countries will benefit in the short term.

On the other hand, there are also long-term costs. A price cap would prevent markets from sending reliable signals, making it harder for producers to make capital investment decisions for future supply. In the 2000s, rising oil prices caused a boom in shale oil development in the United States.

Today, these signals are most relevant in Asian countries. The Organization of the Petroleum Exporting Countries (OPEC) expects US and European oil demand to fall by 6 million barrels per day by 2045. In contrast, demand from India and China could increase by 10.3 million bpd, contributing nearly 60% of global demand growth.

Long-term supply relationships will become more important as the transition to renewable energy accelerates and investments in oil extraction become less attractive. For Asia, a price cap doesn’t make sense in the long term and may not be very beneficial in the short term either.

Background News

— US Treasury Undersecretary Ben Harris told reporters on Thursday that the G7 countries’ plan to cap the price of Russian oil would help India lower the price of oil purchases further. “Each country could choose not to formally participate in the price cap, and could use the newly born ‘leverage’ to gain an advantage in negotiating the purchase of Russian oil. “We have already seen reports that they are looking a contract because Russia is afraid of price caps,” he said. Harris said he expects the system “to win pretty much everyone but Russia.”

* India’s Business Standard 11th newspaper said: “Artificial changes to the well-established international pricing mechanism could have unintended consequences later. India will continue to consider several options.” A senior government official said:

(The author is a columnist for Reuters Breakingviews. This column is based on the personal opinion of the author.)

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