The Treasury Department on Friday issued a “preliminary guidance” for a G7 plan to implement a price cap on Russian oil that is shipped by sea.
The guidance warned that buyers of Russian oil who don’t abide by the price cap could be targeted by US sanctions. It said that individuals who make “significant purchases of oil above the price cap” or provide false information about Russian oil “may be a target for a sanctions enforcement action.”
The idea of the price cap is to prohibit insurance and other maritime services for shipments of Russian oil if it is not sold at the set price, which still hasn’t been decided on. The guidance said that the price will be set by a “coalition” of countries.
The Treasury Department said that the price cap will take effect on December 5, but major questions about the plan remain, including how Russia will respond. Moscow has warned of retaliation and Russian President Vladimir Putin recently said Russia would cut off energy supplies to any countries that try to impose price caps.
As a major oil supplier, Russia produced about 10.9 million barrels per day in 2021. If Russia retaliates by cutting oil production, global prices would skyrocket. Analysts at JPMorgan Chase have warned that if Russia responds to the G7 price cap by reducing oil output by 3 million barrels per day, it would bring prices up to $190 per barrel. In the worst-case scenario, Russia would slash production by 5 million barrels, bringing prices up to a “stratospheric” $380 per barrel.
Despite the warnings, Treasury Secretary Janet Yellen has continued to spearhead the push for the price cap plan. She fears the repercussions of EU sanctions that will take effect in December and prohibit insurance for Russian oil shipments, which are still reliant on insurers in Europe.
Yellen’s price cap plan would reverse the EU insurance ban if the oil is sold at a set price. But the plan is almost doomed to fail as it relies on the cooperation of Russia, as well as China and India, who have drastically increased their purchase of Russian oil since the West began implementing sanctions in response to the invasion of Ukraine.