On February 5th, 2023, the EU imposed a further price cap on Russian petroleum products. This comes after the decision, in December 2023, to set a threshold price for Russian crude oil shipped by sea at $60 per barrel. In particular, the new price cap will apply to “premium-to-crude” petroleum products, such as diesel, kerosene and gasoline, and “discount-to-crude” petroleum products, like fuel oil and naphtha. The maximum price agreed on by EU leaders for the former is $100 per barrel and the latter, $45 per barrel. The move is being undertaken by the EU and other G7 countries. This spotlight will focus on the fallout of the price caps on oil products. 

Firstly, Russia, which is the second largest oil exporter in the world, will see a decrease in its fiscal revenues in the coming months. Earnings from oil and gas-related taxes and export tariffs accounted for 45 percent of Russia’s federal budget in January 2022. Contrary to embargoes, the price caps implemented by the EU ensure Russian oil products keep flowing into the market, whilst starving Moscow of revenue. In January, Russia’s government revenues decreased by 46 percent compared to last year and government spending surged due to higher military spending. A study by the Centre for Research on Energy and Clean Air reported that Russia is already losing $175 million a day from fossil fuel exports. The new price caps enforced in February will likely reinforce this trend and contribute to the widening Russian deficit, which was $25 billion in January. In response, the Kremlin might increase the shift of its oil product exports to China, India, and Turkey, which collectively now make up 70% of all Russian crude flows by sea and have so far contributed to partly offset the impact of Western sanctions on the Russian economy. At the same time, Moscow might scale up its efforts to bypass price caps imposed by G7 nations through its growing “ghost fleet”, which in January moved more than 9 million barrels of oil. However, these new importers have acquired considerable leverage vis-à-vis Russia. As Adam Smith, former sanctions official with the US Treasury Department, put it “Am I going to buy oil at anything above [the price cap], knowing that’s the only option Russia has?”. This might mean that, even if the Kremlin succeeds in re-orienting its exports of oil products to these new destinations, it will do so at lower prices.

On the other hand, the EU may face a diesel deficit in the coming months. In 2022, Russia accounted for almost half of the EU’s diesel imports, corresponding to around 500,000 barrels per day of the fuel. This will push European countries to try to step up imports of diesel from the US and the Middle East in order to avoid a spike in diesel prices. High fuel prices are politically sensitive and have contributed to high inflation rates across the EU. New trade flows in oil products from these regions could lead to a spike in clean tanker rates, which would increase delivered fuel costs in Europe. Tanker rates from the Middle East to the EU were already close to a three-year high at $60/tonne in January. They are expected to double this year. Moscow has responded to the EU price caps by cutting its oil output by 5 percent, or 500,000 barrels a day. Headline inflation in the eurozone has decreased for the third consecutive month in January but the threat of a rebound in inflation in the near future still looms large.

In such a case, the prospects for an increase in social tensions would become more concrete. Already in September of last year, due to the rising cost of living, protesters in Rome, Milan, and Naples set fire to their energy bills in a coordinated demonstration against escalating prices. In October, thousands of people marched through the streets of France to express their dissatisfaction with the government's inaction regarding the cost of living. In November, Spanish employees rallied together chanting "salary or conflict" in demand of higher wages. However, an increase in salaries would risk pushing up prices even more, thus jeopardising the European Central Bank’s efforts to bring inflation under control.