G7 and EU announce price cap on Russian diesel: How it could impact prices

G7 and EU announce price cap on Russian diesel: How it could impact prices

Context- The European Union has joined the United States and the United Kingdom in banning imports of Russian diesel and other refined oil products, as it looks to end its energy ties with Moscow which for years had been its biggest source of energy.

The ban is coupled with a price cap on Russian refined fuel, aimed at hurting Russian revenue while ensuring the EU fuel embargo doesn’t end up driving up global diesel prices which are already high.

The oil products embargo comes two months after a similar ban on Russian crude oil brought in by sea — both announced in June as part of the EU’s sixth sanctions package against Russia in response to Moscow’s “brutal and unprovoked attack on Ukraine.”

Will the ban drive up diesel prices?

  • That would largely depend on how successful the European countries are in finding alternative sellers to help fill up the void caused by the ban and how effective Moscow is in finding new markets for its fuel shunned by the EU. If those two things happen, then the impact on supply and prices would be muted and short-lived.
  • If not, then the sanction could lead to major disruptions in diesel-reliant industries such as transportation and agriculture, with fuel price rises further undermining the fight against inflation.
  • The perceived disruption is already driving up diesel prices, which already have been stubbornly high over the past year and a half. While the situation has improved in recent months due to a mild winter, diesel stocks remain at uncomfortable levels.
  • Diesel prices could climb further in the short term to reflect an increase in shipping costs as supplies would now need to come from regions further afield, higher production costs in countries such as the US and the risk premium.

Who could the EU turn to for diesel?

  • The EU relied on Russia for nearly half its diesel needs before Russia’s invasion of Ukraine on February 24, 2022. That share dropped over the past year but remained significant with EU members buying in excess of 200 million barrels of diesel last year, according to energy analytics firm Vortexa.
  • In fact, in the run-up to the ban, the bloc increased its purchases from the country to pre-invasion levels in preparation to wean itself off Russian fuel
  • The ban has left the EU with a void of about 600,000 barrels of diesel and related oil products per day, a gap that the EU intends to plug with increased supplies from the Middle East, Asia and the US.
  • With its own refining capacity under duress, the EU has already been relying on those regions over the past months to make up for the shortfall.
  • The bloc could benefit from so-called washing, wherein Russian diesel would be blended with other non-Russian products in countries such as Turkey and re-exported back into Europe.

How about China and India?

  • India and China, which have emerged as the biggest buyers of Russian crude oil in the last 12 months, could play a big role in shoring up the EU’s diesel stocks.
  • India’s diesel exports to Europe have soared since the invasion as refiners take advantage of low feedstock costs thanks to steeply discounted Russian crude and high diesel prices.
  • In a sign of times to come, last year, when workers’ strikes shut down the French refining sector, the EU saw a surge in diesel and related products imports from India, which isn’t a traditional supplier of the fuel to Europe.
  • China has raised its first batch of 2023 export quotas for diesel and other refined oil products, exports of which have surged in recent months. The move is expected to keep its diesel exports at record levels, which could potentially help push barrels from other producers westward into Europe.

Where will Russia sell its diesel?

  • Russia has managed to keep its crude oil flowing, largely with support from India and China, who have snapped up the oil shunned by Moscow’s traditional European buyers at huge discounts. However, rerouting its diesel away from its largest market could be more challenging in the absence of a ready market for Russian fuel.
  • Experts expect Russian diesel earlier sold to Europe to be diverted to Turkey and countries in Latin America and Africa.

What would be the impact of the diesel price cap?

  • The European Union and the Group of Seven (G7) industrialized countries on Friday agreed to set a $100 (€91) per barrel price cap on Russian diesel and a $45 per barrel cap on discounted products like fuel oil.
  • The price cap is meant to ensure that Russian diesel and other oil products can still be sold to third countries and prevent any massive spike in prices following the EU ban.
  • The mechanism would allow European insurance and shipping firms to continue offering their services to shippers carrying Russian oil products to other regions as long as the fuel is purchased at or below an agreed cap level.

Conclusion- The disruption caused by the price cap is expected to drive up fuel prices. It aims to achieve two goals i.e. reducing flow of revenue to Russia and ensuring prices don’t go sky high because of complete removal of Russian fuel from market

Source- Indian Express

Syllabus- GS-3; Economy

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