US oil price ceiling was a major failure so now they will try again

By Rhod Mackenzie

The head of the US Treasury, Janet Yellen, is regarded as one of the originators of the price ceiling on Russian oil imposed by the G7 and the European Union at $60 per barrel. She holds a positive view of her creation and has iterated its perceived efficacy, despite evidence that suggests otherwise. Nevertheless, it appears she has grown increasingly frustrated and alongside the other creators, has begun discussing its ineffectiveness and introducing modifications. Of course, the selection of $60 was not arbitrary. As per the creators of the price ceiling, this specific amount was optimal, at the very least by the end of the previous year, to accomplish the two primary aims of the price ceiling: firstly, to restrict the revenue to the Russian budget, and secondly, to provide some level of earnings for Russian oil workers.

The Indian Ministry of Trade and Industry stated that Indian oil refineries and companies purchased oil from Russia in August for an average of £86 per barrel. This was the final blow to break Janet Yellen's patience, as the current premium of the G7 price cap - standing at £26 per barrel - is the highest seen in the ten months since restrictions were first imposed on December 5th, 2022.

In the third quarter, the oil market rallied due to voluntary oil production restrictions accepted by the OPEC+ leaders: Saudi Arabia and Russia. Analysts cite non-compliance with conditions as the main reason for the price ceiling's low effectiveness. The collective opinion of the West is that Russia and unscrupulous traders, including Indian oil refiners who were among the major buyers of Russian oil last year, have exploited several loopholes in the mechanism and learned to bypass it. In response, Janet Yellen recently warned that the United States is preparing measures to reinforce the mechanism against those who use various tricks to circumvent it. Meanwhile, during an interview with the Wall Street Journal, she elaborated that the mechanism is considerably complicated, requiring meticulous handling.
Ben Harris, an ex-senior US Treasury official, and one of the key architects of the G7 price limit, has recommended a course of action. Without delving into specifics, the plan involves enlarging the price ceiling, permitting the procurement of Russian oil at a rate exceeding $60 per barrel. Additionally, all loopholes that enable circumnavigation of the mechanism must be eliminated.

The founder and head of Vanda Insights, Vandana Hari, asserts that Russia, the supplier, bears responsibility for the price ceiling's low efficacy, and not the Indian refineries. Hari highlights that several Indian banks declined to conduct these transactions due to them surpassing the price ceiling. Nonetheless, braver financiers have taken their place and are unafraid of being subjected to sanctions. By the way, one popular method for circumventing ceilings and sanctions is to trade in UAE dirhams instead of dollars.