WASHINGTON (NYTIMES) - 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 US-led effort to drain President Vladimir Putin's war chest and stabilise global energy prices.
The price cap has been a top priority of 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 that 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, in particular, the maritime insurance sector, which facilitates global oil shipments and is key to making the proposal work. Under the plan, it would be legal for them 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 European Union 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 top 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 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 year end. Britain was expected to enact a similar ban but has not yet done so.
The United States want those sanctions to include a carve-out that allows for Russian oil to be sold, insured and shipped if it is purchased at a price that is well below market rates. It argues that this would diminish the revenue that 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 G-20 rich and developing nations met in Indonesia in July.
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 had 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.
Russian central bank governor Elvira Nabiullina said last month that she believed Russia would not supply oil to countries that imposed a cap, and predicted that it would lead to higher oil prices worldwide. Other Russian officials have suggested that the nation would not sell oil at prices below its production costs.
In a report last month, JPMorgan analysts predicted that if Russia did not cooperate with a price cap, three million barrels of Russian oil a day could be removed from global markets, sending prices up to US$190 per barrel. Curbing output indefinitely would damage its wells, they said, but Russia could handle a shutdown temporarily while sustaining its finances.