<blockquote>
<p>What will be the effect of this cap- will it be an effective economic sanction?</p>
</blockquote>
<p>The effect will be that Russia gets less revenue from EU and the west for the sale of their oil.</p>
<p>Yes, according to economic theory, it will likely be an effective sanction. Contrary to many sanctions on Russia prior to this, this is actually a 'smart' sanction. That is, this sanction actually has some economic rationale behind it. Although for oil it would be best if we would use tariffs, price cap makes more sense with gas, it still is more sensible than total embargo (see <a href="https://www.zora.uzh.ch/id/eprint/222702/1/172987_global_economic_consequences_of_the_war_in_ukraine_sanctions_supply_chains_and_sustainability.pdf" rel="nofollow noreferrer">Mikhail et al 2022</a>).</p>
<blockquote>
<p>Why can’t Russia sell the oil to a non G7 intermediary who sells it to G7? And what will it do to the market price of oil ?</p>
</blockquote>
<p>They can but they can only do that at a discount. So this hurts Russia's oil revenue.  There is also consensus among economists this will hurt the revenues of Russia (see <a href="http://eprints.lse.ac.uk/116998/1/businessreview_2022_09_28_will_an_oil_price_cap_manage_to_reduce_the.pdf" rel="nofollow noreferrer">here</a>).</p>
<p>The reason why this sanction is more rational than pure embargo is that under embargo you can still have resale of oil (which still hurts due to discounts), but it does push the oil price higher for EU so it unnecessarily damages European economies, and the point of sanctions is to hurt the other side, not to shoot yourself in the foot. In this case, if the cap is chosen at the optimal level (which can be debated), the sanction might simultaneously lower Russian oil revenue while preventing the price of oil to get too high so that either Russia offsets its losses due to price increase or it hurts EU economies too much. At the same time it minimizes the damage to the European economies. Again one can debate whether the right price was chosen to achieve this goal, and for oil a tariff might be better, but in principle this is much more rational than let's say an embargo.</p>

CC BY-SA 4.0
2022-12-03T11:54:28.380Z
2022-12-10T12:19:32.787Z
2022-12-10T12:19:32.787Z
1muflon1
<p>G7 countries have just announced that they will not buy oil from Russia unless the price is USD 60/barrel or below.  What will be the effect of this cap- will it be an effective economic sanction? Why can’t Russia sell the oil to a non G7 intermediary who sells it to G7?  And what will it do to the market price of oil ?https://www.bbc.com/news/world-europe-63843893</p>

<pricing><oil>
What will be the Effect of the Russian oil Price Cap
dm63
# What will be the Effect of the Russian oil Price Cap

(Asked by: username_0 on 2022-12-03)

G7 countries have just announced that they will not buy oil from Russia unless the price is USD 60/barrel or below. What will be the effect of this cap- will it be an effective economic sanction? Why can’t Russia sell the oil to a non G7 intermediary who sells it to G7? And what will it do to the market price of oil ?https://www.bbc.com/news/world-europe-63843893

**Tags:** pricing, oil

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## 1 answers

### Answer by username_1 on 2022-12-03. Score: 2 | Accepted answer

> What will be the effect of this cap- will it be an effective economic sanction?

The effect will be that Russia gets less revenue from EU and the west for the sale of their oil.

Yes, according to economic theory, it will likely be an effective sanction. Contrary to many sanctions on Russia prior to this, this is actually a 'smart' sanction. That is, this sanction actually has some economic rationale behind it. Although for oil it would be best if we would use tariffs, price cap makes more sense with gas, it still is more sensible than total embargo (see [Mikhail et al 2022](https://www.zora.uzh.ch/id/eprint/222702/1/172987_global_economic_consequences_of_the_war_in_ukraine_sanctions_supply_chains_and_sustainability.pdf)).

> Why can’t Russia sell the oil to a non G7 intermediary who sells it to G7? And what will it do to the market price of oil ?

They can but they can only do that at a discount. So this hurts Russia's oil revenue. There is also consensus among economists this will hurt the revenues of Russia (see [here](http://eprints.lse.ac.uk/116998/1/businessreview_2022_09_28_will_an_oil_price_cap_manage_to_reduce_the.pdf)).

The reason why this sanction is more rational than pure embargo is that under embargo you can still have resale of oil (which still hurts due to discounts), but it does push the oil price higher for EU so it unnecessarily damages European economies, and the point of sanctions is to hurt the other side, not to shoot yourself in the foot. In this case, if the cap is chosen at the optimal level (which can be debated), the sanction might simultaneously lower Russian oil revenue while preventing the price of oil to get too high so that either Russia offsets its losses due to price increase or it hurts EU economies too much. At the same time it minimizes the damage to the European economies. Again one can debate whether the right price was chosen to achieve this goal, and for oil a tariff might be better, but in principle this is much more rational than let's say an embargo.


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