G7 price cap on Russian oil: How does it work and what is the aim?

The G7’s price cap on Russian seaborne oil came into force on Monday, December 5.

Russia has declared that it will not abide by the Group of Seven’s measure even if it means it has to cut oil production.

The new cap will be imposed by the G7 nations, Australia, and the 27 European Union countries.

As the price cut makes headlines, you might find yourself wondering how the measure works and why it was put into place.

Here’s everything we know.

How does the price cap work?

The price cap on Russian seaborne oil has been set at $60 per barrel, which converts to £49.09.

This will mean that the G7 and EU insurance and reinsurance companies that provide services for the tankers carrying Russian crude oil, and the organisations financing them, will not be allowed to accept and carry oil unless it’s bought at or below the price cap.

There will be a 45-day transition period from December 5 until January 19, to allow ships that were loaded before the price cap came into force to unload their cargo without any consequences.

If a third-party country-flagged ship intentionally goes against the measure, EU operators will be prohibited from insuring, financing, and servicing the ship for 90 days after the cargo has been unloaded.

EU-flagged vessels will be subject to penalties.

The price cap level will be reviewed every two months, starting in mid-January, to make sure the cap stays at least five per cent below the average price for Russian crude oil based on the International Energy Agency’s data.

If a change in the price cap is needed, it will have to be unanimously agreed on by all 17 countries of the EU and then by the G7.

What’s the aim of the price cap on Russian seaborne oil?

The price cap was put into place to ensure that Russia cannot use oil sales to finance its war against Ukraine.

Selling oil and gas to Europe is one of the main sources of Russia’s foreign currency earnings.

In August, Reuters reported that Russia’s energy exports went up by 38 per cent this year compared to 2021, boosting their earnings to $337.5 billion (around £27 billion).

The measure also aims to preserve the stability of the global oil market and prevent unexpected, significant hikes in prices.