How the EU ban and price cap on Russian oil will work

The European Union is taking another big step towards severing its energy ties with Russia. The 27-nation bloc is banning Russian refined oil products such as diesel fuel and is joining the US and other allies in placing a price cap on sales to non-Western countries.

Europe's decision comes into effect today following its embargo on coal and most oil from Russia. The decision is intended to further reduce dependence on Russian energy and payments to the Kremlin's war chest as the anniversary of the invasion of Ukraine approaches.

The latest energy sanctions carry risks: oil prices have already risen since the war began on February 24, and there is uncertainty about how the EU embargo and price cap will affect the global market.

How will the embargo and price cap work?

European importers have cut Russia's share of EU imports to 27% in December from more than half before the start of the war.

U.S. suppliers have boosted deliveries to record levels, from 34,000 bpd in early 2022 to 237,000 bpd so far in January, according to S&P Global.

New refinery capacity coming online this year in Kuwait and Saudi Arabia and next year in Oman could also help. India is another possible source. Russia, on the other hand, will have to find new customers.

The price cap plays a key role in the embargo: It is designed to prevent Russian oil from disappearing from the global market and causing prices to rise for everyone, while still reducing the revenue that supports Moscow's military.

The limit is enforced because it prevents Western companies that largely control shipping and insurance from handling oil priced above the border as it goes to countries like China and India. Evasion is possible, but requires setting up alternative insurance or organizing a fleet of tankers that are not available.

The cap was set at $100 a barrel for oil and other crude oil products, such as jet fuel, in an agreement by the G-7 countries - the US, UK, Japan, Canada, France, Germany and Italy - plus the EU and Australia.

The price ceiling is $45 per barrel for other products that are made from crude oil but trade below the price of oil, such as oil used in the boiler and power plant industry.

Source: AP