What effects will the G7’s price cap on Russian crude oil and petroleum products have?

According to the G7’s official announcement, the price cap on Russian oil exports will be jointly determined by participating countries. This measure will take effect alongside the EU’s next round of sanctions, including a ban on maritime imports of Russian oil starting in December. As announced by European Commission President Ursula von der Leyen at the end of May, leaders of all 27 EU member states had reached consensus on the sixth package of sanctions against Russia: seaborne imports of Russian crude oil will be fully banned within six months of the sanctions’ entry into force—accounting for roughly two-thirds of the EU’s total crude oil imports from Russia. Once Poland and Germany cease receiving Russian oil via pipelines by year-end, the EU’s oil import ban will cover approximately 90% of its Russian oil imports. Regarding the price cap itself, the proposed floor of USD 40 per barrel roughly corresponds to Russia’s budget breakeven price—i.e., below USD 40, Russia’s national budget would fall into deficit. Russia has already declared it will not sell oil at a loss, suggesting USD 40 represents a firm lower limit. The proposed upper limit of USD 60 is broadly aligned with current international oil market prices. Due to Western sanctions, earlier reports indicated that Russia had been supplying crude oil to India at roughly 70% of prevailing international prices. Assuming a Brent crude benchmark price of USD 100 per barrel, the implied Indian purchase price would be around USD 70—meaning the proposed cap sits above India’s current acquisition cost. The G7 plans to extend this mechanism to the EU. Yet the rationale behind this move—and whether it will achieve its intended objectives—merits careful scrutiny. First, the practical impact on the EU is likely minimal: the EU has already banned seaborne imports of Russian crude oil, and by year-end the ban’s coverage will reach 90%. Even if the EU were to permit imports of Russian oil priced within the capped range, Russia would almost certainly refuse to supply the EU—rendering the measure largely irrelevant for the bloc. Second, the impact on other major Russian oil importers—such as India and Middle Eastern countries—will be more significant. Russia has increased oil shipments to Asia and the Middle East; some of this crude is refined there and subsequently re-exported to Europe and the United States, thereby undermining the effectiveness of the sanctions.

With the embargo imminent, will oil prices remain high?

At 00:00 Beijing time on May 31, domestic fuel prices were raised again—pushing the price of 92-octane gasoline in some regions above RMB 9 per liter. Across the Atlantic, U.S. drivers are equally distressed: nationwide average gasoline prices have recently hit record highs, with California’s average reaching USD 6.05 per gallon—far exceeding USD 4.135 per gallon a year earlier. Globally, motorists face continued frustration, as oil prices are unlikely to ease significantly in the near term. EU Ban on Russian Oil On Monday, EU leaders agreed to impose a partial ban on Russian oil, paving the way for the sixth round of sanctions against Russia. According to two informed sources at the Brussels summit, the sanctions will prohibit purchases of crude oil and petroleum products shipped from Russia to EU member states by sea—but will temporarily exempt pipeline-delivered oil to secure Hungary’s approval. Hungary has consistently argued that pipeline oil should be excluded from the ban, citing its heavy reliance on Russian crude delivered via the Druzhba pipeline and warning that a full ban would jeopardize its economy. This round of sanctions covers over two-thirds of Russia’s oil exports to the EU. EU officials stated that the bloc has committed to banning 90% of its Russian oil imports by the end of 2022. Russia is the EU’s largest energy supplier. Data show that, over the five-year period ending in 2021, Russia supplied the bulk of the EU’s primary energy imports: on average, about 40% of the EU’s imported natural gas, 27% of its imported oil, and 46% of its imported coal came from Russia. According to the latest report from Eurostat, in 2021, 24.8% of the EU’s oil imports—approximately 108.1 million tonnes—came from Russia, representing 47% of Russia’s total crude oil exports. Thus, cutting two-thirds of these imports would create a crude oil shortfall of about 60 million tonnes for the EU; a 90% ban by year-end would widen the gap to nearly 100 million tonnes. Following the announcement, international oil prices surged sharply, climbing above USD 121 per barrel—the highest level in two months. London-traded Brent crude futures rose USD 2.24 to USD 121.67 per barrel (+1.9%), while WTI crude futures gained USD 1.99 to USD 117.06 per barrel (+1.7%). U.S. and OPEC Output Unable to Meet Demand It had been widely anticipated that rising prices would spur U.S. oil production to increase by an average of one million barrels per day in 2022. In reality, however, output growth has amounted to only 10%—insufficient to meet demand. Many oil companies face mounting cost pressures and raw material shortages. For instance, U.S.-based exploration firm Lone Star Productions reported it cannot procure the necessary steel pipes, resulting in project delays and higher costs.

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