GS Paper3/GS Paper 2
Syllabus: Indian Economy/ Internal Relations
Source: Indian Express, The Hindu
Context: Western countries, G7 and European Union have agreed to cap the price of Russia’s oil exports (to $60 per barrel) in an attempt to limit the fossil fuel earnings that support Russia’s budget, its military and the invasion of Ukraine.
What is the price cap?
A price-cap regulation is a form of economic regulation that establishes an upper limit on the prices that a utility provider can charge.
Impact of the price cap:
- Increase volatility in the Oil market: The price cap could have an uncertain effect on the price of oil as worries over lost supply through the boycott compete with fears about lower demand from a slowing global economy
- Hurt Russia’s Finance: The price cap is meant to hurt Russia’s finances while avoiding a sharp oil price spike if Russia’s oil is suddenly taken off the global market.
- Insurance companies and other firms needed to ship oil would only be able to deal with Russian crude if the oil is priced at or below the cap.
Impact on India:
- Buyers in India might not go along with the cap
- Russia or China or India could try to set up their own insurance providers to replace those barred by U.S., U.K. and Europe.
Counter-measures by Russia:
Experts say a $60 cap will not have much impact on Russia’s finances. Russia (the world’s No. 2 oil producer) has already rerouted much of its supply to India, China and other Asian countries at discounted prices after Western countries shunned it even before the EU ban.
- Russia has said it will not observe a cap and will halt deliveries to countries that do.
- Fear of Black Marketing: Russia also could sell oil off the books by using “dark fleet” tankers with obscure ownership
Conclusion:
Experts view that the $60 cap is way too high. A $30 cap would “give Russia the financial crisis”. But “$60 is better than not agreeing at all”
Insta Links:
Prelims link:
- What is a Price cap?
- Balance of Payments
- Balance of trade
- About Petrodollar System
Mains Link:
Q. Policymakers have little control over the dollar and crude oil. It is impossible to take a call on how these prices will move. Explain.
