Since Russia invaded Ukraine, the United States' energy strategy has pursued two broad goals that seem to be in direct opposition. The first step is to maintain a worldwide oil supply that is sufficient to keep prices within a reasonable range while maintaining a high level of popular support for sanctions. The second strategy is to choke Vladimir Putin's military machine by cutting off the flow of funds that Russia collects from selling oil barrels.

Together, they create a difficult circle because, with supply and demand closely matching one another and a shortage of new production, removing even a little amount of oil from the market would automatically cause prices to rise. Despite this, Western markets have developed increasing policies intended to interfere in the oil market to circumvent the rule of physics.

The ones implemented up to this point have often been piecemeal and included compromises that could be better. On November 26th, the United States of America permitted the large American oil company Chevron to increase its production in Venezuela, puncturing its own sanctions on the tyrannical dictatorship in that country. Additionally, significant amounts of crude oil were released from the United States' strategic reserves; as a result, these reserves are now at their lowest point since 1984.

What To Anticipate From The Newly Implemented Oil Price Cap In Russia

The price cap on Russian oil, which nations in the Group of Seven (G7) have been threatening for some time as a reaction to Russia's conflict in Ukraine, is now becoming a reality. This cap was promised in response to Russia's actions in Ukraine. Office of Foreign Assets Control (OFAC) of the United States Treasury Department released a decision to pursue the cap along with comprehensive recommendations for market players the week before last.

On Friday, following a protracted period of back-and-forth negotiating, ambassadors from the European Union (EU) are said to have given their approval to an initial set ceiling of sixty dollars a barrel. In the next few days, other participating members of the price limit will be required to provide their signatures.

How Exactly Will The Target Cost Be Implemented? Will It Be Successful?

The ceiling prevents businesses in participating countries from providing shipping, insurance, and other services to shipments of Russian crude oil sold at a price per barrel greater than a certain threshold, which in this case is sixty dollars. These services include trading and brokering. In actuality, it will be the responsibility of these suppliers to request evidence from their customers that they have made purchases at prices that comply with the price restriction.

The advisory provided by OFAC demonstrates some awareness of the possibility that shipping and insurance companies might need accurate information on the amounts their customers pay for each shipment. It requires them to obtain attestations that the limit has been respected via standard contract clauses that are both straightforward and easy to understand. Companies that make these requests will not likely be subject to enforcement proceedings. By using this strategy, OFAC and its equivalents will have the right to go after anybody who may have misled in an attestation, such as by engaging in a separate transaction that is more than the limit.

What Type Of Repercussions Will This Have On The World Stage?

The actions of Washington, Brussels, and other capitals will be evaluated based on whether or not we see a decrease in Russia's export revenues despite an increase in domestic gas prices that are not excessive. Whether the limit is the deciding factor or not is irrelevant so long as these two requirements are met.

Currently, the limit is not considerably lower than the price of Russian oil, so it is unclear how Moscow would react to this development. Russian President Vladimir Putin recently gave the green light to increase output. If most of Russia's supply continues to be sold on the market, the impact on prices will be minimal.

Should global prices rise, and the cap requires Russia to accept an even greater discount, we anticipate that Moscow would react by reducing the number of goods it sells. The issue is whether this is a little decrease or if a significant portion of Russia's supply will become inaccessible for the time being. Since reaching their high point in July, prices have dropped significantly. The government's participation in the price limit has soothed market players. Still, the fundamental reason for this is the possibility of a recession in the G7. At first, our primary concern was that introducing new levels of complexity would raise market tension, which would lead to increased pricing.