US putting the oil price cap hat in the ring

The US is trying to convince India to join a buyer's cartel for Russian oil at capped prices, as the next level of sanctions set in by the year-end. The Group of Seven (G7) countries are inclined to a price ceiling over a ban on insuring Russian maritime oil exports because the latter course could drive up global crude prices. India, which has entered into a special agreement with Russia to buy discounted oil, wants a broader agreement among oil-buying nations for the price cap plan to be implemented. Separately, Russia is discussing cheap long-term oil contracts with Asian buyers in an attempt to counteract the G7 bid to cap export prices. In either scenario, Russia may have to give up pricing power over energy exports that is helping fund its war with Ukraine. It could also stop pumping oil. But that would be an extreme step because oil wells are difficult to restart.

The G7 plan, though better than a transportation embargo, is not without its share of issues. First, for it to work, the price ceiling must be above production costs, leaving Russia with the incentive to produce. Second, buyers of Russian oil must be on board, which includes India and China. Gaining Chinese support for a plan to exempt Russian oil exports below a cut-off price from an EU ban on insuring shipments will be harder to come by because of its land border with Russia. Third, implementation will depend on transparency, which is difficult to achieve. Otherwise, there would have been an oil buyers' cartel by now. By seeking a broader consensus, India's position represents a nuanced approval to the price cap plan.

India's position on securing affordable energy has been received well by the West, and it is in no one's interest that oil prices shoot up again. Russia could sweeten its oil export arrangement and India would do well to seek better terms from a strategic ally.