Date: 09/12/2022

Relevance: GS-2: Effect of Policies and Politics of Developed and Developing Countries on India’s interests

Key Phrases: Group Of Seven Advanced Economies (G7), Price Cap On Oil Exports From Russia, European Union, Inclusive Energy Transition, Tighter Sanctions, Strategic Autonomy, Fixed Dollar-Per-Barrel Cap.

Why in News?

• The G7 and Australia, as current members of the Price Cap Coalition, have reached a consensus on a maximum price of $60 a barrel for seaborne Russian-origin crude oil, in line with the unanimous decision taken by Member States of the European Union to endorse a price level for the price cap on seaborne Russian-origin crude oil.

Key Highlights:

• The cap, which will be adjustable in order to respond to market developments, will be implemented by all members of the Price Cap Coalition through their respective domestic legal processes.
• While the EU’s ban on the import of Russian seaborne crude oil and petroleum products remains in place, the price cap will allow European operators to transport Russian oil to third countries, provided its price remains strictly below the cap.

How will it be enforced?

• For countries that join the coalition, it would mean simply not buying Russian oil unless the price is reduced to where the cap is determined.
• For countries that don’t join the coalition, or buy oil higher than the cap price, they would lose access to all services provided by the coalition countries including for example, insurance, currency payment, facilitation and vessel clearances for their shipments.
• G7 countries had earlier said they were aiming to reduce the price of oil, but not the quantity of oil that Russia sells, so as to control inflation globally while hurting the Russian economy and its ability to fund the war in Ukraine.
• However, if Russia is able to sell large enough volumes of its crude at a price higher than the cap, it would mean a huge squeeze on oil availability to the coalition countries, especially the G7 which are major consumers, and could result in global oil prices skyrocketing.

What do the nations imposing the price cap hope to achieve?

• The sanctions and the price cap are targeted at the Kremlin to weaken the Russian government’s ability to finance its aggression against Ukraine.
• The initiative will hit Russia’s revenues even harder and reduce its ability to wage war in Ukraine.
• It will also help to stabilize global energy prices, benefitting countries across the world, that are currently confronted with high oil prices.
• The cap has been specifically designed to further reduce Russia’s revenues, while keeping global energy markets stable.
• It will, therefore, also help address inflation and keep energy costs stable at a time when high costs particularly elevated fuel prices are a concern in the EU and across the globe.

Will the price cap impact India’s oil trade?

• The price cap is likely to be advantageous for countries like India, China and other major buyers who have been purchasing discounted barrels from Russia. The price cap would give them leverage to push down the price they pay to Russia.
• As the conflict has dragged on, India has first ramped up purchases of the flagship Urals crude, which is sourced from the western part of Russia, and is now competing for ESPO, a distillate-rich grade.
• Russia's share of India's oil imports surged to an all-time high of 23% from 19% the previous month while that of the Middle East declined to 56.4% from 59%.
• Iraq remained India's top supplier while Russia overtook Saudi Arabia as the second biggest.
• Hence, Indian refiners are already getting Russian oil at below or near price cap levels. So, as and when the price caps are imposed it is unlikely to have any negative impact on India's oil imports.
• India hopes to convert the current global oil challenges from the Ukraine crisis into an opportunity to secure affordable energy.

Will Russia be affected by this move?

• If large consumers like China and India continue to purchase oil from Russia, the impact will not be huge on the Russian economy.

Conclusion:

• In recent months, Russia has limited discounts on crude oil, hence, India is now turning to Africa and the Middle East instead of Russia due to higher freight rates.
• India has been rapidly diversifying its crude sources and could buy more oil from the United States, Guyana and other nations in the coming years.

Source: Indian Express

Mains Question:

Q. Despite causing a significant impact on import bills, coal is still inevitable for development. Critically Analyse. (150 words).