Europe reaches deal for $100 per barrel price cap on Russian diesel

European Union governments tentatively agreed on Friday to set a USD 100-per-barrel price cap on sales of Russian diesel to coincide with an EU embargo on the fuel steps aimed at ending the bloc's energy dependence on Russia and limiting the money Moscow makes to fund its war in Ukraine.

Diplomats representing the 27 EU governments set the cap on Russian diesel fuel, jet fuel and gasoline ahead of a ban taking effect on Sunday.

It aims to reduce Russia's income while keeping its diesel flowing to non-Western countries to avoid a global shortage that would send prices and inflation higher.

 

The information was provided by diplomats from 3 different EU member nations ahead of a formal announcement by the Group of Seven major industrialized nations. They spoke on condition of anonymity because the official announcement would come later.

The USD 100-per-barrel cap applies to Russian diesel and other fuels that sell for more than the crude oil used to make them. Officials agreed on a USD 45-per-barrel limit on Russian oil products that sell for less than the price of crude.

The deal follows a similar G-7 agreement to limit the price of Russian crude oil to USD 60 a barrel.

All the price ceilings are enforced by a requirement for the world's largely Western-based shippers and insurers to abide by sanctions and handle oil products only priced at or above the limits.

Russia has said it will not sell to countries obeying the oil cap, but because its oil is selling for less than USD 60 per barrel, it has kept flowing to the global market. The price caps encourage non-Western customers that have not banned Russian oil to press for discounts, while outright evasion though possible carries additional costs such as organising off-the-books tankers.

The ambassadors of the 27 EU nations put forward the decision, and national governments have until early Saturday to react with a written objection. No changes to the deal were expected.

Europe has been steadily reducing its diesel supplies from Russia from around half of all imports. Diesel is key for the economy because it is used to power cars, trucks carrying goods, farm equipment and factory machinery. Prices have spiked since Russia invaded Ukraine on rebounding demand and limited refinery capacity in some places.

If the price cap works as intended and Russian diesel keeps flowing, fuel prices should not skyrocket, analysts say. Europe could get alternate supplies of diesel from the US, India and the Middle East, while Russia could seek new customers outside Europe.

However, the impact of the cap will be unpredictable as shippers reroute flows of the fuel to new destinations, and longer sea journeys could strain tanker capacity.

Fossil fuel sales are a key pillar of Russia's budget, but European governments previously hesitated to cut off their purchases because the economy was heavily dependent on Russian natural gas, oil and diesel. Since the start of the war in Ukraine, that has changed.

Europe cut off Russian coal and later banned its crude oil on December 5. Meanwhile, Moscow has halted most supplies of natural gas to Europe, citing technical issues and a refusal by customers to pay in Russian currency. European officials say it is retaliation for sanctions and an attempt to undermine their support for Ukraine.