WASHINGTON • The Biden administration's push to form an international buyers' cartel to cap the price of Russian oil is facing resistance amid private sector concerns that it cannot be reliably enforced, posing a challenge for the United States-led effort to drain President Vladimir Putin's war chest and stabilise global energy prices.
The price cap has been a top priority of US Treasury Secretary Janet Yellen, who has been trying to head off another spike in global oil costs at the end of the year. The Biden administration fears the combination of a European Union embargo on Russian oil imports and a ban on the insurance and financing of Russian oil shipments will send prices soaring by taking millions of barrels of that oil off the market.
But the untested concept has drawn scepticism from energy experts and the maritime insurance sector, which facilitates global oil shipments and is key to making the proposal work. Under the plan, it would be legal to grant insurance for oil cargo only if it was being sold at or below a certain price.
The insurers, which are primarily in the EU and Britain, fear they would have to enforce the price cap by verifying whether Russia and oil buyers around the world were honouring the agreement.
"We can ask to see evidence of the price paid, but as an enforcement mechanism, it is not very effective," said Mr Mike Salthouse, global claims director at The North of England P&I Association, a leading global marine insurer. "If you have sophisticated state actors wanting to deceive people, it is very easy to do."
He added: "We have said it won't work. We have explained to everybody why."
This has not deterred Dr Yellen and her aides, who have been criss-crossing the globe to make their case with international counterparts, banks and insurers that an oil price cap can - and must - work at a moment of rapid inflation and the risk of recession.
The Biden administration is trying to mitigate the fallout from sanctions adopted by the EU in June, which would ban imports of Russian oil and the financing and insuring of Russian oil exports by the year end. Britain was expected to enact a similar ban but has not yet done so.
The US wants the sanctions to include a carve-out that allows for Russian oil to be sold, insured and shipped if it is purchased at a price well below market rates. It argues that this would diminish the revenue Russia took in while keeping oil flowing.
Treasury Department officials have played down the notion that global participation is needed, arguing that countries such as India and China, which have been purchasing Russian oil at deep discounts, could benefit from a price cap without signing on to the agreement.
Leaders of the Group of Seven agreed in late June to explore the concept. The idea drew mixed reviews after finance ministers of the Group of 20 rich and developing nations met in Indonesia last month.
The US hopes to have an agreement in place by Dec 5, when the EU ban takes effect, but many details remain unresolved, including the price at which Russian oil would be capped.
Treasury officials have said the price would be set high enough so that Russia would have an incentive to keep producing. Some commodities analysts have pointed to a range of US$50 to US$60 per barrel as a likely target, which is far lower than the current price of around US$100 a barrel.
But a big wild card is how Russia might respond, including whether it retaliates in ways that drive up prices.