In early June, at the behest of the Biden administration, German leaders gathered top economic officials from the Group of 7 nations for a video conference with the goal of striking a major economic blow against Russia.
The Americans had tried, in a series of one-off conversations last year, to pitch an unusual and untested idea to their counterparts in Europe, Canada and Japan. Administration officials wanted to try to cap the price Moscow could demand for each barrel of oil sold on the world market. Treasury Secretary Janet L. Yellen had presented the plan a few weeks earlier at a meeting of finance ministers in Bonn, Germany.
The reception had been mixed, in part because other countries weren’t sure how serious the administration meant going forward. But the talk in early June left no doubt: U.S. officials said they were committed to the oil price cap idea and urged everyone else to get on board. At the end of the month, the group of 7 leaders undersigned to the concept.
As the Group of 7 prepares to meet again this week in Hiroshima, Japan, official and market data suggest the unproven idea has helped achieve its dual initial goals since the price cap entered into force in December. The cap appears to force Russia to sell its oil for less than other major producers, as crude prices fall significantly from levels immediately following Russia’s invasion of Ukraine.
Data from Russia and international bodies suggest Moscow’s revenues have fallen, forcing budget choices that administration officials say could begin to hamper its war effort. Drivers in America and elsewhere are paying far less at the gas pump than some analysts feared.
Russia’s oil revenues in March was down 43 percent from a year earlier, the International Energy Agency reported last month, although its overall export sales volume had increased. This week, reported the authority that Russian revenues had recovered somewhat but were still down 27 percent from a year ago. Government tax revenue from the oil and gas sectors fell by almost two-thirds from a year ago.
Russian officials have been forced to change how they tax oil production in an apparent attempt to make up for some of the lost revenue. They also appear to be spending government money to try to start building their own network of ships, insurance companies and other essentials of the oil trade, an effort that European and US officials say is a clear sign of success.
“The Russian price ceiling is working and working extremely well,” Wally Adeyemo, deputy finance minister, said in an interview. “The money they’re putting into building this ecosystem to support their energy trade is money they can’t spend building missiles or buying tanks. And what we’re going to continue to do is force Russia to have these kinds of difficult choice.”
Some analysts doubt the plan is working nearly as well as administration officials claim, at least when it comes to revenue. They say the most-cited data on the prices Russia receives for its exported oil is unreliable. And they say other data, such as customs reports from India, suggest Russian officials may be using elaborate fraud schemes to avoid the cap and sell crude at prices well above its limit.
“I’m concerned that the Biden administration’s desperation to claim victory with the price cap is preventing them from actually acknowledging what’s not working and taking the steps that might actually help them win,” said Steve Cicala, an energy economist at Tufts University who has written about potential escapes under the hood.
The price cap was invented as an escape hatch to the economic sanctions that the US, Europe and others announced on Russian oil exports in the immediate aftermath of the invasion. These sanctions included bans preventing rich democracies from buying Russian oil on the world market. But early in the war, they basically fought back. They drove up the cost of all oil globally, regardless of where it was produced. The higher prices delivered record export earnings to Moscow, while driving US gasoline prices above $5 a gallon and contributing to President Biden’s declining approval ratings.
A new round of European sanctions would hit Russian oil hard in December. Economists on Wall Street and in the Biden administration warned that these penalties could knock oil off the market and send prices soaring again. So administration officials decided to try to take advantage of the West’s dominance of oil shipping — including how it is transported and financed — and force a hard bargain on Russia.
Under the plan, Russia could continue to sell oil, but if it wanted access to the West’s shipping infrastructure, it had to sell at a deep discount. In December, European leaders agreed to set the ceiling at $60 per barrel. They came with other caps for different types of petroleum products, such as diesel.
Many analysts were skeptical that it could work. A cap that was too punitive had the potential to encourage Russia to sharply limit how much oil it pumps and sells. Such a move could push crude oil prices higher. Alternatively, a cap that was too permissive may have failed to affect Russian oil sales and revenues at all.
Neither scenario has happened. Russia announced a modest output cut this spring but has mostly continued to produce at roughly the same levels as when the war began.
Fatih Birol, the executive director of the International Energy Agency, has called the price cap an important “safety valve” and a crucial policy that has forced Russia to sell oil at much lower prices than international reference prices. Russian oil now trades for $25 to $35 a barrel less than other oil on the global market, Treasury officials estimate.
“Russia played the energy card and it didn’t win,” Mr. Supporting role wrote in a February report. “Given that energy is the backbone of Russia’s economy, it is not surprising that its difficulties in this area lead to bigger problems. Its budget deficit is soaring as military spending and subsidies to the population largely exceed its export income.”
Biden administration officials say there is no evidence of widespread evasion from Russia, and that Cicala’s analysis of Indian customs reports does not take into account the rising cost of transporting Russian oil to India, which is embedded in customs data. A White House official told reporters traveling with Mr. Biden in Hiroshima on Thursday that the Group of 7 leaders would adopt new measures to counter price cap flight during their meeting this weekend.
There is no doubt that the world has avoided what was privately the biggest concern of Biden officials last summer: another round of soaring oil prices.
American drivers paid an average of about $3.54 a gallon for gas on Monday. That was down nearly $1 from a year ago, and nowhere near the $7 a gallon some administration officials feared if the cap had failed to prevent a second oil shock from the Russian invasion. Gas prices are a mild source of relief for Mr. Biden as high inflation continues to hamper his approval ratings among voters.
After rising sharply in the months surrounding the Russian invasion, global oil prices have fallen back to levels seen at the end of 2021. The move is driven in part by economic cooling around the world, and has persisted even as major producers such as Saudi Arabia have cut output.
Falling global prices have contributed to Russia’s falling revenues, but that’s not the whole story. The reported sale prices of exported Russian oil, known as Ural, have fallen by twice as much as the global price of Brent oil.
The Group of 7 leaders meeting in Japan this week probably won’t spend much time on the roof, instead turning to other collective efforts to limit Russia’s economy and revenues. And the biggest winners from the cap decision won’t be at the summit.
“The direct beneficiaries are mostly emerging markets and lower-income countries that import oil from Russia,” Treasury officials noted in a recent report.
The officials were referring to a handful of countries outside the Group of 7 — notably India and China — that have used the cap as leverage to pay a discount for Russian oil. Neither India nor China joined the formal cap effort, but it is their oil consumers who see the lowest prices from it.
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