Treasury: Oil Price Cap Phase Two Effective

The Oil Price Cap permits service providers in Coalition countries to support the Russian oil trade only if the oil was sold at or below a specific cap.

To continue to have access to dominant Coalition service providers, Russia responded to this policy by selling its oil at a significant discount to market.

The first year saw material success  of the oil price cap.  Kremlin oil tax revenue was more than 40 percent lower in the first nine months of 2023 compared with a year earlier, while global energy supply remained stable.

As a result, the Kremlin focused on evasion, in particular enabling the "shadow fleet" of ships, insurers and other service providers willing to skirt the sanctions.   Driven by these factors and price increases in the world oil market, the average price that Russia earned on its oil rose above the cap.

In response, in October 2023, the Coalition launched the price cap’s second phase tightening enforcement and increasing the costs of this alternative shipping ecosystem.

Assistant Secretary for Economic Policy Eric Van Nostrand (P.D.O.) and Acting Assistant Secretary for Terrorist Financing and Financial Crimes Anna Morris look at the difference that the price cap is continuing to make three months into the second phase, as the coalition continues to take action to enforce the prohibition against the use of G7 services outside the cap.

The data shows that that coalition sanctions enforcement is successfully forcing Russia to sell oil at a discount while Russian oil export markets have remained stable.

Three key observations on its progress:

1. The price at which Russia sells its oil has declined markedly since the second phase began. The shift reflects the effects of reduced global oil prices, but also a significant widening in the discount Russia earns relative to other global oil suppliers.  That discount rose from a low of $12 to $13 per barrel of crude oil in October to about $19 per barrel over the past month.  
2. Energy market participants, analysts, and even Putin’s own oil czar have linked the rising discount on Russian oil to the Coalition’s increased enforcement activities reflected in the second phase of the price cap.
3. Russian oil export volumes remained stable in recent months. The price cap is maintaining a steady supply of energy to global consumers and businesses. At the same time, the price cap, along with key sanctions enforcement measures, is reducing Putin’s profits from selling that oil.

[Research Note]