July, Friday 8th., 2022
Hey G7!What does it take for you to comprehend that time has come for you to stop meddling with the normality of human lives?M.L.P.
One More Time... Here's Why Putting A Price Cap On Russian Oil Won't Work
Authored by Irina Slav via OilPrice.com,
In theory, the concept that has recently been taken up by the G7 of putting a price cap on Russian oil makes a lot of sense.
In practice, however, putting a price cap on Russian crude will be extremely difficult and potentially very counterproductive.
It seems the most effective way to achieve this goal would be through insurers, but there is no guarantee that Russia wouldn’t respond by cutting exports.
The oil price cap: this is the biggest energy weapon that the U.S. appears to have against Russia.
First floated by Italian PM Mario Draghi earlier this year with regard to all oil producers, the idea was later taken up by Treasury Secretary Janet Yellen in discussions with the European Union on how to punish Moscow. Now, it’s been taken up by the G7. The news that the G7 is considering putting a ceiling on the price for Russian export crude garnered a lot of coverage, but there was little in the way of explaining how exactly a price cap would work. The only specific suggestion was to tie oil prices to insurance, with Russia only being able to insure its oil cargos at a price below a certain level.
The Prime Minister of Japan, Fumio Kishida, suggested this week that the cap should be placed at half the current price for Russian crude. Russian oil already sells at an often steep discount to alternatives, and a further cut in half would put the price close to the level Russia uses for its federal budget.
Talks are continuing between officials from the G7, but analysts are already weighing in, and their comments do not look particularly encouraging.
“Something like this could only work if you get all of the key producers and crucially all of the key consumers working together and then finding some way of enforcing whatever plan you come up with,” Neil Atkinson, an independent oil analyst, told CNBC this week.
This looks like a tough job:
Getting the whole of OPEC+, or even its biggest members, to turn on their partner Russia would certainly be easier said than done.
Getting China and India on board with a price cap may also be easier said than done, even though both are heavy importers and would certainly appreciate lower prices.
But there is a much bigger problem with the price cap suggestion:
“Do we really think that Russia will actually accept this and not retaliate? I think this sounds like a very, very good theoretical concept but it is just not going to work in practice,” Energy Aspects’ Amrita Sen told CNBC.
Sen also made a crucial remark in her comments on the oil price cap.
She told CNBC that the idea that countries around the world are on the same page as Western politicians on anything but particularly energy security was “the biggest misconception right now.”
What this basically suggests is that the G7 presidents and premiers may be on board with the idea of capping oil prices to punish Russia, but the rest of the world has a different opinion that might be difficult to change, especially fast.
In a recent analysis for the Carnegie Endowment for International Peace, an international affairs think tank, Sergei Vakulenko, a Germany-based energy analyst, wrote the assumption that Russia will not retaliate against a price cap may well be wrong.
The assumption, Vakulenko wrote, was “that Russia would prefer to see some revenue, as long as it covers the marginal cost of production and allows for some profit, rather than to leave the oil in the ground and see no money at all.”
However, he added, “Russia is a strategic player with a somewhat exotic value function, adept at negative-sum games. In addition, at least for now, hard currency revenue is of limited value for Russia, as illustrated by the plummeting dollar and euro exchange rates on the Moscow exchange.”
There are, then, two quite considerable obstacles for the G7 heads of state and their governments.
The first, and smaller one, is to figure out exactly how to impose the oil price cap.
The insurance scenario sounds like it makes sense, although there are doubts it might end up punishing insurers instead of Russia.
The second, and much bigger obstacle, is the assumption that Russia will take it all lying down.
It is a dangerous assumption, as already noted by analysts, and a costly one, as reported by JP Morgan, which has estimated that if Russia decides to cut exports in response to the cap, oil could soar to $380 per barrel.
There is also an additional problem:
G7 is running out of time to cap the price of Russian oil.
The EU will be effecting an embargo on all seaborne Russian oil imports at the end of the year. The U.S. has already banned imports of Russian hydrocarbons. A price cap after the European embargo has come into effect would make little sense.
There have been a lot of jokes on the internet that Europe has been shooting itself in the foot with its sanctions against Russia, hurting itself a lot more than its stated enemy. Based on analysts’ comments, putting a price cap on Russia’s oil exports could well be even more counterproductive than some of the current policies.
