But it will also be the case that Russia’s ability to produce oil is going to diminish, because it was very reliant on Western firms to work on challenging projects in the Arctic and develop new oil resources. So, I think there will still be challenges for the policy going forward. The tightness in the energy market has receded somewhat because of slow growth in China and their exit from “zero-COVID,” and because we had large releases from the U.S. We have benefited a bit from global conditions. Yes, it is-although there was this increase in the spread after the price cap was imposed. I imagine it is difficult to tease apart the impact of the price cap from the effect of lower oil prices overall and the stigma of doing business with Russia. The Russian benchmark grade of oil is called “Urals.” Starting at the beginning of the of the war with Ukraine, Urals started to trade at a discount to Brent-which is the global benchmark price-because there were just fewer people who wanted to take the risk of transporting Russian oil. Right now, it appears to be working in the sense that oil markets have not been significantly disrupted, and Russia appears to be collecting lower revenues than prior to the price cap (Figure 1). The views cited in this article do not necessarily reflect those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.Īs we are talking today, it has been about six weeks since the Russian oil price cap went into effect. He left Treasury in October 2022 to join the Minneapolis Fed. In his role at Treasury, Mehrotra advised Secretary Janet Yellen and Treasury officials on the effects of the proposal on the U.S. 3 A similar cap for refined petroleum products began Feb. 5, 2022, by the Group of Seven nations (including the U.S. negotiators agreed at the 11th hour on a cap of $60 per barrel, implemented on Dec. “It’s a release valve so that some Russian oil can get out, while not giving Russia a windfall,” Mehrotra said. Mehrotra and his colleagues at Treasury drew up a novel solution: European firms could provide shipping services to Russian crude shipments only if Russia sold the oil below a specific price. Neil Mehrotra Assistant Vice President and Policy Advisor But if Russian oil doesn’t get to the market somewhere, then there’s a global shortfall that would have significant ramifications for the price.” In recent years, Russia produced around 15 percent of the world’s oil. doesn’t want Russian oil, Europeans don’t want Russian oil-that’s fine. 1 “The Europeans were proposing a sanction that, if successful, could cause the price of oil to go to $150 or $200 a barrel,” Mehrotra said. priority, this ban on shipping services posed its own risk to the American economy-even though the U.S. While starving Russia’s war effort was a top U.S. They also proposed to leverage European dominance in insurance, financing, and ocean shipping logistics to strike a deeper blow-by forbidding European firms to provide these essential services for Russian oil shipped anywhere in the world. Despite Europe’s dependence on Russian energy, European governments laid the groundwork for an eventual ban on imported Russian oil. When Russia invaded Ukraine, Mehrotra was the deputy assistant secretary for macroeconomic analysis at the U.S. “It’s actually a pulling back of sanctions that would have been much more disruptive.” “The price cap is mistakenly seen by many as another sanction, but it’s not really,” said Neil Mehrotra, an economist, assistant vice president, and policy advisor at the Minneapolis Fed. Amid the array of restrictions on Russian industries and persons, it is tempting to view the new price cap on Russian oil as just one more attempt to tighten the vise.
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