Price caps’ initiatives: resolving critical global energy and trade issues

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Two recent actions by the G-7 and the EU-27, i.e. on price cap and on “corrective mechanisms” from the EU, are regarded –at least in the political sense – good enough to remedy present critical energy situation. Aimed to address rising inflation and keep energy costs stable at a time when high fuel costs, these actions are a reflection of concern for European and other states around the world. All eyes will be on oil markets this week, as the global powers agreed on the long-promised ban on the import of seaborne Russian crude oil…  

For example, “Politico” acknowledged that Russia’s oil export is extremely important for the global energy and development situation: Russia is still the world’s second-biggest crude oil exporter, after Saudi Arabia; and e.g. in 2021 around half of those exports went to the European states. According to the International Energy Agency, IEA “the war hasn’t changed much in Russia’s ability to make cash from oil”; thus, Russian total oil export is still providing for huge revenues. For example, this October, Russian total export was at the level of 7.7 million barrels per day, which is only 400,000 barrels per day lower than pre-war levels.
However, already during 2022, Russian exports to the EU states have fallen dramatically, reducing by 1.5 million barrels per day, to a total of 3.95 million barrels per day by October, according to the IEA; most of that Russia-European supply has been rerouted to China and India.
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Global initiatives
The G7, the EU and Australia, as current members of the Price Cap Coalition (Germany, the EU, Australia, the UK, Canada, France, Italy, Japan and the US) reached consensus on 2 December 2022 on a maximum price of 60 USD per barrel for seaborne Russian-origin crude oil. The decision hits three main goals: a) to limit Russia’s ability lead its war of aggression, b) support stability in global energy markets, and c) minimise negative economic spillovers of energy crisis on low- and middle-income countries. The price cap enters into force as of 5 December 2022 for crude oil and as of 5 February 2023 for petroleum products; the price for refined products will be finalised in due course, noted the Commission.
The G7 statement says that the coalition “will announce the maximum prices for Russian-origin petroleum products (one for high-value and one for low-value refined products) separately”.

After the initial cap has been set, the price may be amended in the future to reflect market developments and technical changes, as agreed by the Price Cap Coalition. This review should take into account a variety of factors, which can include the effectiveness of the measure, its implementation, international adherence and alignment, the potential impact on coalition members and partners, and market developments.
The OPEC+ group, which includes Saudi Arabia, other major oil-producing Middle Eastern, African, Latin American, Central Asian countries plus Russia, met virtually on 4 December and agreed not to change policy for now, Reuters reported.
So, it needs for the global players to take care not to hurt themselves, particularly those EU-27 states, as well as a fragile global economy, in general, through the “cap-coalition’s” process…

The EU-27 initiative
The price cap on Russian-origin crude oil will enter into force across the EU-27 jurisdictions from 5 December 2022 and so on; respective regulations will include possibly time-limited exception for transactions involving oil that is loaded onto a vessel at the port of loading prior to 5 December 2022. Details on the implementation of the price cap will be seen in guidance released by the Commission and/or by the EU legislation.
The Commission underlined its “firm intention to harmonise the implementation of the price cap across EU jurisdictions to the maximum extent possible, minimizing complexity and burdens for market actors. Necessary measures to address possible circumvention and elusion will be duly considered, in line with the respective domestic legal processes”.
It has to be noted that the origin of the price cap in the EU goes back to 2014, just after power revolt in Ukraine. The price cap rate has been initially approved by a unanimous decision of the Council as an Annex XI to Decision 2014/512/CFSP. In accordance with this Decision, the price cap has been inserted into EU law by an amendment of Annex XXVIII to Regulation (EU) 833/2014 via a Commission Implementing Act. Any subsequent changes would require the same procedure i.e. a Council Decision and a Commission Implementing Act. Additional information will be published in the Official Journal of the EU.
The price cap does not affect the full EU import ban on Russian crude and petroleum products; it is not violate specific exceptions and derogations which were already agreed in previous EU’s sanctions packages. These exceptions and derogations allow certain EU member states to continue importing crude oil and petroleum products from Russia due to their specific situation or to import seaborne crude oil from Russia if the supply of crude oil by pipeline from Russia is interrupted for reasons beyond their control.
For example, some EU member states like Hungary, the Czech Republic and Slovakia will continue receiving Russian oil through the existing oil-gas-pipelines for an indefinite period; besides, Bulgaria also has a special temporary exemption from the Russian seaborne oil ban until the end of 2024…
Specific projects which are essential for the energy security of certain third countries may be also exempted from the price cap; the current list of exempted projects referred to in Article 3n(6)(c) are contained in Annex XXIX to Regulation (EU) 833/2014.
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Then, it is predicted that in February 2023, a new European ban on imports of Russian oil products, such as gasoline, diesel and jet fuel would comes into force…


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