Oil Price Cap Could Ruin Russian War Chest

Leaders of the world's largest developed economies are considering a price ceiling on Russian oil in order to hit the Kremlin's primary source of revenue following its invasion of Ukraine and to prevent the global devastation caused by high energy prices, the Associated Press (AP) reported.

Photo Insert: Russia is selling less oil as Western consumers avoid its supply, but higher prices have offset a large portion of the loss to state revenues.

Details have yet to be agreed upon at the Group of Seven meeting in Elmau, Germany, but the main concept is to attach the price cap to the services that allow oil trade to take place. Insurers would be prevented from engaging with shipments that exceed the cap, whichever it is set to be.

Because insurers are mostly headquartered in the European Union (EU) and the United Kingdom (UK), Russia is likely to have trouble finding large-scale remedies.

Limiting the price would limit the Kremlin's income from oil, which was approximately $450 million per day from Europe alone at the outset of the conflict.

The limitation would also limit the impact of rising oil prices on inflation in consuming countries, where the cost of gasoline and diesel is pinching households and businesses. But a lot depends on whether Asian countries like India agree to the price cap. The issue of enforcement is crucial, and European authorities are equally concerned about the potential consequences.

Russia is selling less oil as Western consumers avoid its supply, but higher prices have offset a large portion of the loss to state revenues. Despite Western sanctions, the country's central bank has managed to keep the ruble stable, thanks in part to oil earnings.

Brent crude is currently trading at $113 per barrel, up from $79 per barrel at the start of the year. As a result, gas prices have reached an all-time high of more than $5 a gallon in the United States and more than $7.50 in Germany.

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