The price ceiling will be lowered to $50 per barrel: the consequences for Russia are named

Oil production and budget revenues will fall sharply

By the end of March, the G7 states will revise the price ceiling for Russian oil. This was announced at the CERAWeek international energy conference in Houston by Elizabeth Rosenberg, assistant to the head of the US Treasury for combating the financing of terrorism and financial crimes. She did not provide any additional details.

However, observers agree that the cap price will be set at $50 per barrel. Since December 5, 2022, it has been at around $60. In America, the action of the mechanism is assessed positively. According to US presidential adviser on energy security issues Amos Hochstein, “the process is underway, and this is its beauty: Russian oil and oil products are sold below the designated threshold.”

In fact, now we are talking about a routine procedure, because the task of revising the price ceiling is fixed in the documents of the European Union, and the frequency is determined – every two months. This is also not news because the White House has always said that the goal of sanctions is to cut Russia’s income, and not create ground for a shortage in the commodity market, says Artem Deev, head of the analytical department at AMarkets. In his opinion, the marginal price will be adjusted to $50 per barrel, if not lower.

“For the Russian economy, this decision will have two consequences,” says Deev. – Firstly, we will have to reduce oil production, since at some fields it will become unprofitable (the level of profitability may be at around $40, if we add transportation and insurance here, it turns out to be just $50 per barrel). The previously officially announced reduction in production by 500,000 barrels per day will not stop: it will need to be cut even more – to 1 million barrels per day. Thus, oil production in the country will decrease by 5-15% from the current level of 10 million bpd. Accordingly, the volume of revenues to the budget of the MET (tax on the extraction of minerals) and other fees will fall.”

And most importantly, cheaper export supplies will lead to the fact that the oil and gas revenues of the treasury, which have already collapsed by half compared to last year, will decrease even more. So far, the Ministry of Finance manages to compensate them through the sale of yuan and gold, but at this rate, the reserves of the National Welfare Fund will run out faster, and they will not be enough even for one and a half to two years, as previously assumed. According to Deev, at the end of the year, the budget deficit, which amounted to 2.6 trillion rubles in January-February alone (against the plan for the whole year at 2.9 trillion), may exceed 5 trillion. A hole of this size will force the government to consolidate the budget for 2023, that is, reduce spending items. Surely there will be new initiatives to increase the fiscal burden for businesses, which at the household level are fraught with an increase in the price of fuel for ordinary consumers and another round of inflation.