U.S., European Allies Try to Restrain Global Oil Prices: Treasury Secretary Janet Yellen says talks aim to limit Moscow’s energy revenue and keep Russia’s supplies flowing to prevent a recession

Governments of oil importing countries are trying to figure out how to reduce oil prices without decreasing demand or increasing supply, and also they want to get more Russian oil exports without paying Russia for the oil...

WASHINGTON—The U.S. and its allies are searching for ways to limit further surges in global oil prices, attempting to balance efforts to cut off Russia’s revenue from its energy sales while shielding the global economy from a possible recession.

Treasury Secretary Janet Yellen said this week that the U.S. was involved in “extremely active” talks with European allies about efforts to form a buyers’ cartel and set a cap on the price of Russian oil. A goal in the talks is to keep Russian oil available on global markets to buyers such as India and China, which could help stabilize prices already trending at roughly double prepandemic levels, while constructing a mechanism Western countries could use to restrict Russian revenues from the sales.

“I think what we want to do is keep Russian oil flowing into the market to hold down global prices and try to avoid a spike that causes a world-wide recession and drives up oil prices,” Ms. Yellen said. “But absolutely the objective is to limit the revenue going to Russia.”

The European Union and U.S. have already moved to ban imports of Russian oil after the invasion of Ukraine, and the EU is also advancing with a ban on insuring shipments of Russian oil. Because European entities import a much larger amount of Russian oil and ship and insure much of it globally, its moves have larger consequences for global prices.

Ms. Yellen has said that EU moves could significantly raise global oil prices, underscoring the difficulty global policy makers face in trying to punish Russia and limit damage to the global economy simultaneously.

An idea under discussion among the Group of Seven wealthy nations is to turn to insurers to try to set a price cap. Shipments of oil are often insured by companies in the EU or U.K., and officials are exploring the possibility of those insurers only covering shipments of Russian oil to non-European countries that fall under the price cap, according to people familiar with the discussions. Such a move would be constructed to be consistent with the EU insurance ban, according to the people.

U.S. officials from the Treasury Department are traveling to the U.K. and continental Europe this week to discuss sanctions, and Deputy Treasury Secretary Wally Adeyemo joined the group to travel to London at the start of the week.

With gasoline prices climbing to records in the U.S., and inflation the Biden administration’s top economic policy priority, U.S. officials across the administration are reviewing ways to try to stabilize global oil prices and still penalize Russia, according to a senior Treasury official. Biden administration officials are studying details of break-even costs for Russian oil producers as well as how the oil is shipped, according to the Treasury official.

European officials say discussions are continuing through the G-7 on how to work with the U.S. and others to ensure energy sanctions have a global effect without causing a surge in oil and natural-gas prices, though there is no indication that the EU will revisit the oil and insurance sanctions it passed after weeks of difficult negotiations.

Some analysts expect the EU moves will permanently hamper Russia’s ability to produce and sell oil, putting significant long-term upward pressure on global oil prices. Russians face deep logistical hurdles to sell large volumes of oil elsewhere and are eventually forced to shut in wells when they run out of storage, these analysts say.

Russia, which analysts said is already selling oil at a roughly $30 a barrel discount compared with global benchmark prices, receives about $10 billion a month from the EU for crude and oil products, according to Bruegel, a Brussels-based think tank. Russia exported roughly 2.5 million barrels of crude a day to the EU before the war.

“We think it’s somewhat limited as to how much oil Russia can just place elsewhere,” said Bob McNally, president of Rapidan Energy Group, who worked in the George W. Bush administration on energy policy. He said Russian exports could drop by as many as 3 million barrels a day. “That’s a loss in global oil production,” Mr. McNally said.

Even deeper production cuts in Russia could raise the price of oil globally to $200 a barrel, a jump that could push much of the world into a recession, said Claudio Galimberti, senior vice president of analysis at Rystad Energy. Crude oil traded above $120 a barrel on Wednesday.

“Reducing Russian production too fast can be extremely detrimental and so we have to be very careful about that,” he said. “There’s very fragile balances, and the moment you start playing with them it takes a while for markets to find another equilibrium. It takes time, and it can be painful.”

Not only would significant jumps in global oil prices inflame inflation around the world, but such high prices could allow Russia to maintain or even increase its net revenue from oil sales even as it loses buyers. Ms. Yellen has previously said that the European embargo on Russian oil could ultimately allow Russia to net more revenue from its oil sales as global prices rise.

Others expect Russia to adapt to the EU moves and be able to keep selling a similar quantity of oil in non-European markets, meaning the EU embargo ultimately does little to cut into Russia’s cash flows. India in particular has stepped up its purchases of Russian crude since the war began.

A price cap set on Russian oil through insurers in the EU and U.K. would put a limit on the revenue Russia can derive from those other sales. Another option for setting a price cap is using secondary sanctions, a step that Ms. Yellen has said was also being discussed.

A possible secondary sanctions regime would threaten countries—in particular, India and China—with losing access to U.S. financial institutions if they purchase Russian oil at a price outside of parameters set by the U.S. But such a move carries diplomatic risks for the U.S., both toward India and China as well as the EU, which has previously resisted U.S. secondary sanctions.

While setting the cap through sanctions on insurance might be less diplomatically difficult for the U.S., the goal is similar: finding a way for Russian oil sales to continue.

“Perhaps you do want some oil to go to China and India to prevent the markets from going completely crazy,” said Rystad Energy’s Mr. Galimberti.