Why The G-7 Fuel Price Cap Will Be More Difficult Than It Appears?

Credit: Marcin Jozwiak/Unsplash
  • Russian fuel exports represented about 9% of 2022 sea trade
  • Tanker freight for refined fuels more complex than crude

A recent news article published in the Bloomberg asks ‘Why the G-7 Cap on Russian Fuel Prices Will Be Harder Than it Looks?’

Imposing a cap on the prices at which Russia’s oil refineries

The Group of Seven industrialized nations is 24 days from imposing a cap on the prices at which Russia’s oil refineries are allowed to sell the fuels they make. It’s another historic moment for the global petroleum market.

If all goes to plan, buyers of Russian fuels will only be allowed to tap vital G-7 services including ships and tanker insurance for the cargoes if they pay below as-yet-unspecified price caps. Such measures began for crude oil on Dec. 5, setting an upper threshold of $60 a barrel.

The measures, in tandem with a ban on almost all refined fuel imports to the European Union from Russia, could cause havoc if the thresholds are set wrong for the markets they’re targeting. The move will force some tankers to sail thousands of miles further to get cargoes to buyers.

“We expect that most crude oil exports from Russia will continue to find buyers,” the Energy Information Administration said in a report Tuesday. “But we expect the sanctions on petroleum products will cause greater disruptions to Russia’s oil production and exports because finding alternative buyers as well as transportation and other services to reach those buyers is likely to be more challenging.”

The easy solution would be to set the cap at high enough levels to keep the fuels flowing, as they did with oil. The question is whether there’s the political will for such an approach, when some nations, especially EU member states, want to guarantee Moscow loses revenue.

Here are some of the things the G-7 will have to weigh up:

1. Many Products

The G-7 looks set to introduce two caps: One for those fuels have historically been cheaper than crude, and another, higher threshold for more expensive ones.

That approach has the beauty of simplicity but the markets being targeted are not simple.

There are numerous mainstream oil product categories to deal with, including better known ones like diesel and gasoline. There are others too — fuel oil, naphtha and something called vacuum gasoil — that help to keep global refining and petrochemicals systems functioning efficiently.

Even within those broad groupings, there are numerous subset products, each of which might have different qualities — be it their sulfur content, density or metals content — that make how they trade unique.

Some products hold hidden importance. Vacuum gasoil, for example, is what’s known as a feedstock that many non-Russian refineries process to make other fuels. Naphtha can be used in the production of gasoline or plastics.

So the impact of the caps on individual fuel markets will depend on where the thresholds are set. Diesel is presently trading far above gasoline, for example. If the upper cap is low enough to depress the price of gasoline, then it could be even more dramatic for diesel.

The same would apply to the lower cap. Target high-sulfur fuel oil, which trades well below naphtha, and naphtha could be hit harder. But target naphtha, and the impact on fuel oil would be relatively small.


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Source: Bloomberg