Biden Team Sees Easing Pump Price as Payoff From Russia Oil Cap

Sep 6, 2022

(Bloomberg) The Biden administration sees its effort to cap the price of Russian oil as also damping domestic gasoline prices, a key pocketbook issue heading into the midterm elections.The Russia plan, still being finalized, aims to cut revenues that fund President Vladimir Putin’s war in Ukraine while keeping ample oil supply on the market. While stable prices would aid growth and temper inflation globally, the White House is particularly focused on the political benefit of less painful pump prices heading into the November contest.“Ultimately we want to continue to see downward pressure on gasoline, and on energy prices more generally, and we think the price cap helps to accomplish this goal,” Deputy Treasury Secretary Wally Adeyemo said in an interview at Bloomberg’s New York headquarters Thursday.

Russia’s economy faces years of hardship as a result of the measures taken by the US and its allies over the invasion of Ukraine, Adeyemo said earlier on Bloomberg Television’s “Balance of Power with David Westin.”

Biden’s popularity, and his Democratic Party’s prospects for retaining seats in Congress, is sensitive to the price of gasoline in the US, plummeting with the rise above $5 a gallon, and rebounding as it fell back below $4 in many states.

President Joe Biden has framed the vote as a contest between democracy and extremism. Republican opponents have sought to make it a referendum on Biden’s domestic policies, highlighting the cost-of-living surge and blaming Democratic policies for causing it.

The acceleration in inflation earlier this year was driven mainly by supply concerns, as Putin pursued his invasion of neighboring Ukraine. Brent crude, the global benchmark, has cooled to near $90 a barrel recently as market focus shifts to the threat that a slowing global economy will dent demand.

Finance ministers from the top seven industrialized countries backed the US-led price cap plan last week, with Treasury Secretary Janet Yellen and her counterparts saying in a Sept. 2 statement that their governments would implement the cap in line with European Union sanctions set to kick in on Dec. 5. Details are expected in the coming weeks.

Securing Supply

By providing exemptions to the coming sanctions, the US believes the price cap would prevent the new sanctions from shutting Russian oil out of the global market, which risks causing a spike in prices.

Questions remain as to how effectively a cap could be administered. Adeyemo indicated that shippers of Russian crude would need to state that insurance and other financial services tied to transporting that crude was complying with the cap.

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“What we’ve decided to do is set up a system of attestation where the person who is taking on board the Russian oil on the boat needs to have an attestation,” Adeyemo said in answering questions after a speech in New York later Tuesday. Along with insurance, “we expect trade finance and other financial services to play a role here in making sure we’re able to enforce these sanctions,” he also said.

The deputy Treasury chief said he expects in coming weeks that other countries will announce joining the Russian oil-price cap. He earlier said that India, which has historical ties with Russia and hasn’t joined in the sanctions measures, is open to the idea of joining the price-cap effort.

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Adeyemo also said the Russia oil price cap doesn’t need every major oil buyer to get on board, a response to worries that the lack of participation from countries like India and China would doom the idea. In his view, those countries could exploit the price cap to negotiate deep discounts on oil from Russia, helping to support the price cap’s end goals.

“We also know from countries that we’ve spoken to that even knowing the price cap exists, and knowing the price that the price cap is set at, will give them more leverage in terms of their negotiations with Russia,” he said. That “will ultimately mean that Russia will have to earn less revenues.”

Adeyemo dismissed the idea that the US would have to be prepared to punish countries that don’t join the price-cap coalition with so-called secondary sanctions.

“I don’t think you need secondary sanctions for this to work,” he said. “The incentives of buyers are aligned with the incentives of the countries that are putting in place the price cap. Every country wants to pay as little as possible for energy. Every refiner wants to pay as little as possible for oil.”

More broadly, Adeyemo stressed that several of Biden’s policies, including the $370 billion in funding for green energy in the recently passed Inflation Reduction Act, are aimed at securing lower prices.

“Our goal is to make sure that over the long term, that we have the supply to help meet the demand of American consumers and consumers around the world to help put downward pressure on prices and inflation,” he said.