The Price Cap on Russian Oil : A Quantitative Analysis

A price cap on Russian crude oil, at 60 USD/barrel, was implemented in December 2022. Using parsimonious modeling and detailed Russian oil-field data, this paper studies the price cap’s impact on the Russian economy, global winners and losers and how a cap at different levels affects these dynamics as well as the potential for Russian retaliation. A cap at 60 USD/barrel implies substantial Russian producer losses, and in turn government income losses, of several per cent of GDP. But since the cap diverts oil supply from exports to the Russian domestic market, the losses are partly offset by Russian consumer benefits. Russian net losses are, however, substantial: for every 5 USD that the cap is below the baseline world oil price, Russian net losses are equivalent to around 1% of its GDP (around 30% of pre-Ukraine-invasion military spending). Oil importers generally benefit from a cap as it works like a buyers’ cartel, except if the cap is very low (30 USD/barrel and below) in the long run. Among the major oil importers, India and China are the main beneficiaries due to their oil-intensive economies. A price cap of 40-50 USD/barrel maximizes oil importers’ benefits in the short run and implies virtually no Russian export reduction. In the long run, a cap of 50-60 USD/barrel maximizes oil importer’s benefits. However, every additional reduction of the cap by 5 USD imposes an additional Russian loss of 54 million USD/day (around 1% of GDP). Hence, if oil importers put even a small weight on restricting Russian income, a cap much lower than today is motivated. Russian retaliation through voluntary oil-export restrictions is, however, more likely under a lower cap since such retaliation hurts Russia less and oil importers more when the price cap is low. For a cap at 60 USD/barrel, the credibility of export-restriction threats hinges on Russia prioritizing importers’ harm much more than own-profit maximization. For a cap at 30 USD/barrel, it is sufficient that Russia puts equal weight on harm and own profit for the threat to be credible