Price cap on Russian oil worked better than expected: BP economist

The price cap on Russian oil has worked far better than anyone had expected and there was a delight in capitals from Washington to Brussels that Russian oil flows have increased to India while keeping Moscow's revenue in check, BP chief economist Spencer Dale said on Tuesday.

Since the outbreak of the Ukraine war, Russian oil has been selling at a deep discount to international benchmarks, making it a favourite feed for Indian refiners, which barely imported from Russia in previous years. After the G7 countries imposed a price cap of $60 per barrel on Russian oil in December 2022, the imports have further accelerated.

"All the capitals in the West I have spoken to, they have been delighted by this increase (in India's imports). This is not a problem at all," said Dale, adding that the whole point of the price cap was to keep Russian oil flowing to the global market to avoid any shortage but to do so in a way that "Russia wasn't able to monetise those flows at very high prices".

The consensus among G7 countries was that the price cap had worked better than anyone had expected, he said. "The US treasury has estimated that something like 25% of per quarter of the crude which has been exported from Russia been transported using western transport and insurance, which implies that it is happening below the price cap", Dale said, adding that India's imports of Russian crude have increased to 1.8 million barrels per day (mbd) from 1 million mbd in September 2022.

But there could be a challenge if international benchmark rates rise and the price of Russian oil gets close to the cap, said Dale. "We will have to see how G7 responds to that," he said.

A recent decision by producer club OPEC+ members to cut output has led to an increase in oil prices by about $5 per barrel to $85. This has also pushed up prices for Russia's flagship crude Urals to about $65.

The war highlighted the need for energy security, Dale said, adding that the countries can't rely on markets alone to provide that and that government intervention was needed. "Free markets don't generate the optimal level of public goods like energy security," he said.

No country depends entirely on market to provide energy security, Dale said to a query on how India handled the domestic fuel prices at a time of global volatility.

Pump prices have been frozen for a year in India, with state-run fuel retailers incurring heavy losses in the first six months of 2022-23, when they couldn't raise domestic prices in line with international rates.