United States: Russia’s Oil Prices Cap is Lowering Revenue And Harming its Economy

On Thursday, a top Treasury Department official said that the sanctions against Russia’s oil price are hurting the country’s principal source of income while it is involved in the crisis in Ukraine.

Last year, American officials claimed that a proposal to cap the price of Russian oil revealed by the Group of Seven Nations, the European Union, and Australia would strike a terrible blow to Russia’s economy.

Deputy Treasury Secretary Wally Adeyemo, speaking at the Center for a New American Security on Thursday, highlighted the substantial reduction in Russian oil revenues due to the price cap, emphasizing its impact during a crucial phase in the war. He cited a nearly 50% decline in Russian oil revenues compared to the previous year.

The introduction of the price ceiling was welcomed with a mixture of skepticism and optimism due to the widespread belief that this strategy would prevent military intervention in Ukraine by Russian President Vladimir Putin.

The price cap is only one of many measures placed on Russia by the alliance throughout the roughly 16-month-long fight. Individuals with ties to the Russian government, as well as the banking and financial sectors, imports of technology, and the manufacturing sector, are the primary targets of these sanctions.

Adeyemo has lately claimed that the Kremlin’s decision to impose a new oil industry tax to make up for the income deficit is evidence of the success of the price cap.

“This change will constrain Russia’s oil companies going forward, leaving them with fewer funds to invest in exploration and production and over time diminishing the productive capacity of Russia’s oil sector,“ he said. “There is clear evidence of its success.”

The import embargo enforced by the EU has had a more significant impact on lowering Russian oil profits, according to Lauri Myllyvirta, an expert at the Centre for Research on Energy and Clean Air in Finland.

In the previous year, the European Union made a declaration prohibiting the importation of Russian oil and other goods originating from Russian refineries. Furthermore, in February, Europe enforced a ban specifically targeting Russian diesel fuel.

“The combination of the EU’s oil import ban and the price cap did have an impact,” Myllyvirta said, “but the EU import ban has been the more impactful measure.”

The existing price ceiling on Russian oil, fixed at $60 per barrel, is insufficient to generate a meaningful impact on Russian oil income, Myllyvirta added.

Russia has lowered oil output in response to the punitive measures, and it just announced an extension of the production limits by 500,000 barrels per day through the end of December 2024.

“This is a precautionary measure taken in coordination with the countries participating in the OPEC+ agreement, which previously announced voluntary oil cuts in April,” wrote Alexander Novak, Russia’s deputy prime minister, on the government’s website.

It is possible that falling demand contributed, at least in part, to the voluntary cuts in oil production.

This week, the International Energy Agency released its five-year forecast for oil demand, which shows a gradual decline in the importance of fossil fuels for transportation.

This is consistent with a broader trend in which countries’ efforts to mitigate climate change by shifting to renewable energy sources would gradually lower demand, potentially weakening the economic influence of countries like Russia.

The prediction predicts that gasoline demand will peak in 2023, with the entire demand for transportation fuels peaking in 2026. The International Energy Agency (IEA) says that the global energy crisis, increased efficiency, and the rising popularity of electric vehicles are all contributing causes.