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A plan to forcefully cap Russian oil prices could work

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The US is still “far” from reaching an international agreement to impose a price cap on Russian oil exports, Biden’s senior energy adviser said, while the enthusiasm of India and China, the world’s largest energy buyers, is still limited.

But Amos Hochstein, President Biden’s special coordinator for international energy affairs, said he remains optimistic that Russia will eventually keep producing despite the price cap, in large part because “their economy has nothing to another.”

“We are already seeing evidence in the market that Russia is selling its oil at a significant discount. So we want to bet that maximum,” Hochstein told Yahoo Finance. “So we know they’re willing to sell it at a discount to be able to sell it because, frankly, they have cash in the bank, that’s true, but they don’t have anything else.”

Hochstein’s comments come after Russian Central Bank Governor Elvira Nabiullina said on Friday that Moscow has no plans to ship crude oil to countries that have decided to set cap prices for their exports. Speaking to reporters, Nabiullina added that any Russian oil would be diverted to countries willing to “cooperate” with it.

US President Joe Biden speaks on gas prices during a speech in the South Courtroom of the Eisenhower Executive Office Building at the White House in Washington, USA, June 22, 2022. REUTERS/Kevin Lamarque

The Biden administration has proposed capping the price of Russian oil exports to limit President Vladimir Putin’s income from oil, which Hochstein says is used directly to finance the country’s war against Ukraine. The restriction is intended to keep Russian oil prices low without completely cutting off supplies, which will provoke a devastating jump in world oil prices.

But some EU countries heavily dependent on Russian oil are hesitant to take such a step. This is partly due to fears that Putin will refuse to sell gas at such a price and completely cut off supplies from Moscow.

“An attempt to improve the mechanism”

Last month, the G7 countries agreed in principle to explore ways to ban “all services that enable the transportation of Russian offshore crude oil and oil products around the world, unless the oil is purchased at or below a price to be agreed upon in consultation with international partners. ” Hochstein said the US has yet to decide on the structure of the global price cap.

“We are trying to improve the mechanism of how it will look and work. We haven’t come to an agreement yet,” Hochstein said. “We have an agreement in principle with the major economies, but not an actual agreement.”

Brent crude, the global benchmark, is down significantly after climbing nearly $140 a barrel after Russia went to war with Ukraine earlier this year. On Friday, oil futures settled at around $103 a barrel, though that still marks a rise of more than 30 percent this year.

Gasoline prices are displayed at a gas station in Monterey Park, California on July 19, 2022.  — Gasoline prices in the US have fallen from historic highs in early summer, and the politically concerned White House has noted this decline as a sign of curbing inflation.  President Joe Biden took to Twitter to point out that gas station prices have dropped in more than a month, saving the average driver about $25 a month.  Gasoline prices now average $4,495 a gallon nationwide, down 10 percent from a month ago but up 42 percent from a year ago, according to the American Automobile Association.  (Photo by Frederic J. BROWN/AFP) (Photo by FREDERIC J. BROWN/AFP via Getty Images)

Gas prices are posted at a gas station in Monterey Park, California on July 19, 2022. (Photo by Frederic J. BROWN/AFP) (Photo by FREDERIC J. BROWN/AFP via Getty Images)

U.S. oil prices fell below $95 a barrel for the first time since April after European Union member states decided to adjust sanctions to allow Russian state-owned companies to ship to third countries.

However, critics of the administration’s proposed policy remain skeptical of its effectiveness, in part because Washington has yet to receive any commitment from the world’s biggest buyers, India and China, which remain wary of severing their long-term relationship with Moscow.

The plan will prevail

Since the start of the war, China has nearly doubled its imports from Russia to 1 million barrels a day, while India’s Russian oil imports have grown 24-fold to 600,000 barrels a day, according to the Eurasia Group.

Jorge Montepeque, who is credited with reforming benchmark oil prices, told Reuters that price-fixing mandates have been used before and failed.

“The US tried to fix the price of oil in the 1970s, the UK tried to fix prices in the foreign exchange market in the 80s, Mexico tried to fix the price of tortillas. And then – boom! The market is calming down. It’s a waste of time,” Montepeque said.

Hochstein is convinced that the economic side of the plan will prevail, arguing that “every country wants to pay the lowest possible price.” He added that Russia has very limited options and is likely to force Putin to the negotiating table.

“Their economy has nothing else. They produce weapons, produce and extract oil and gas,” he said.

Akiko Fujita is a presenter and reporter for Yahoo Finance. Follow her on Twitter @AkikoFujita

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