.
T

hough the price of oil has declined in recent weeks, it is still through the roof, filtering through to gasoline prices, and causing economic and political challenges in the United States, the United Kingdom, and Europe. Increased supply from Russia would lower prices, but the revenues from those additional sales would fuel President Vladimir Putin’s war machine.

Adding to the problem is a new round of European sanctions set to target Russian oil imports by the end of the year. Such sanctions could push prices even higher—potentially triggering a global recession.

U.S. Treasury Secretary Janet Yellen has proposed a solution: Allow Russia to continue exporting oil, but impose a cap on the price Russia can charge. This would help keep a lid on oil prices while ensuring that the U.S. and its allies are not funding Russia’s ongoing aggression against Ukraine.

Yellen has been trying to sell world leaders on the plan, and the G7 Leaders’ communiqué at the end of June expressed openness to the idea. The details are still largely unclear, but the plan would stop Russian seaborne exports by denying Russian oil exporters the insurance they need to underwrite tankers—that is, unless Russia agrees to sell its oil at the price cap. Without insurance, ships bearing Russian oil exports could not access crucial international waterways.

The UK and Europe are in a position to exert considerable leverage. According to the Centre for Research on Energy and Clean Air, 68% of deliveries of Russian crude oil this spring relied on EU, UK, and Norwegian ships. Nearly all of the tankers were insured in the UK, Norway, or Sweden.

If all goes according to plan, Russia would still sell the oil, because the price cap would be set at just above the marginal cost of production. At this price, it would make economic sense for Russia to keep producing, but there would be scant profits left over for war financing. And the additional oil being exported from Russia would put downward pressure on global prices.

Of course, all might not go according to plan. Russia could retaliate by cutting off its oil or natural gas exports, inflicting severe harm on many U.S. allies and global markets. Russia would be betting that it could endure the economic pain for longer than countries that rely on its energy exports could. Or Russia could work around the cap, offering to sell its oil to friendly countries for more than the price cap but less than its price on the open market. Something similar is already happening under the existing sanctions regime: China and India, for example, are purchasing oil from Russia at a discount of around $30 per barrel. And the benefits from the price cap could accrue mainly to refiners rather than households.

Still, the cap should be implemented. By not producing, Russia could inflict lasting damage on its oil wells, which it would seek to avoid. Similarly, Russia would be reluctant to burn off its natural gas rather than sell it. Russia may retaliate, but a tighter grip on Russian energy revenues gives Western countries more ammunition to respond, not less. Cash for peace.

Even if the cap doesn’t much lower gasoline prices or if some countries—like China and India—refuse to abide by it, it would still put downward pressure on the price of oil and would reduce the risk that the next round of European sanctions could cause an energy-price shock that throws the global economy into reverse.

Denying Russia’s access to necessary insurance could be used more boldly than only to implement a price cap. The U.S., the UK, and the EU could impose additional requirements on countries that want to buy Russian oil in exchange for allowing insurance companies to underwrite tanker shipments. In addition, similar conditions could be placed on the financing necessary for Russia to export oil.

One idea worth exploring would be requiring countries that purchase Russian oil under the price cap to impose a tariff. Some of the revenue from this levy could be sent to Ukraine to help it rebuild.

In the U.S., this would require Congress to reverse its ban on Russian oil imports. This would be a huge political challenge for President Joe Biden’s administration. It would be similarly difficult for other governments.

But it would allow the price cap to advance three goals, not just two: Keep Russian oil flowing to avoid an oil shock from looming EU sanctions; stop the sale of that oil from financing the war in Ukraine; and use relatively cheap Russian oil to provide partial compensation to Ukraine to address the damage that Putin’s brutal war has caused.

Copyright: Project Syndicate, 2022.

About
Michael R. Strain
:
Michael R. Strain is Director of Economic Policy Studies at the American Enterprise Institute.
The views presented in this article are the author’s own and do not necessarily represent the views of any other organization.

a global affairs media network

www.diplomaticourier.com

Cap Russia’s Oil Price Now

Photo by Chris Liverani via Unsplash.

July 30, 2022

Though the price of oil has declined in recent weeks, it is still through the roof. A proposed solution is to allow Russia to continue exporting oil, but impose a cap on the price Russia can charge, writes American Enterprise Institute’s Michael R. Strain.

T

hough the price of oil has declined in recent weeks, it is still through the roof, filtering through to gasoline prices, and causing economic and political challenges in the United States, the United Kingdom, and Europe. Increased supply from Russia would lower prices, but the revenues from those additional sales would fuel President Vladimir Putin’s war machine.

Adding to the problem is a new round of European sanctions set to target Russian oil imports by the end of the year. Such sanctions could push prices even higher—potentially triggering a global recession.

U.S. Treasury Secretary Janet Yellen has proposed a solution: Allow Russia to continue exporting oil, but impose a cap on the price Russia can charge. This would help keep a lid on oil prices while ensuring that the U.S. and its allies are not funding Russia’s ongoing aggression against Ukraine.

Yellen has been trying to sell world leaders on the plan, and the G7 Leaders’ communiqué at the end of June expressed openness to the idea. The details are still largely unclear, but the plan would stop Russian seaborne exports by denying Russian oil exporters the insurance they need to underwrite tankers—that is, unless Russia agrees to sell its oil at the price cap. Without insurance, ships bearing Russian oil exports could not access crucial international waterways.

The UK and Europe are in a position to exert considerable leverage. According to the Centre for Research on Energy and Clean Air, 68% of deliveries of Russian crude oil this spring relied on EU, UK, and Norwegian ships. Nearly all of the tankers were insured in the UK, Norway, or Sweden.

If all goes according to plan, Russia would still sell the oil, because the price cap would be set at just above the marginal cost of production. At this price, it would make economic sense for Russia to keep producing, but there would be scant profits left over for war financing. And the additional oil being exported from Russia would put downward pressure on global prices.

Of course, all might not go according to plan. Russia could retaliate by cutting off its oil or natural gas exports, inflicting severe harm on many U.S. allies and global markets. Russia would be betting that it could endure the economic pain for longer than countries that rely on its energy exports could. Or Russia could work around the cap, offering to sell its oil to friendly countries for more than the price cap but less than its price on the open market. Something similar is already happening under the existing sanctions regime: China and India, for example, are purchasing oil from Russia at a discount of around $30 per barrel. And the benefits from the price cap could accrue mainly to refiners rather than households.

Still, the cap should be implemented. By not producing, Russia could inflict lasting damage on its oil wells, which it would seek to avoid. Similarly, Russia would be reluctant to burn off its natural gas rather than sell it. Russia may retaliate, but a tighter grip on Russian energy revenues gives Western countries more ammunition to respond, not less. Cash for peace.

Even if the cap doesn’t much lower gasoline prices or if some countries—like China and India—refuse to abide by it, it would still put downward pressure on the price of oil and would reduce the risk that the next round of European sanctions could cause an energy-price shock that throws the global economy into reverse.

Denying Russia’s access to necessary insurance could be used more boldly than only to implement a price cap. The U.S., the UK, and the EU could impose additional requirements on countries that want to buy Russian oil in exchange for allowing insurance companies to underwrite tanker shipments. In addition, similar conditions could be placed on the financing necessary for Russia to export oil.

One idea worth exploring would be requiring countries that purchase Russian oil under the price cap to impose a tariff. Some of the revenue from this levy could be sent to Ukraine to help it rebuild.

In the U.S., this would require Congress to reverse its ban on Russian oil imports. This would be a huge political challenge for President Joe Biden’s administration. It would be similarly difficult for other governments.

But it would allow the price cap to advance three goals, not just two: Keep Russian oil flowing to avoid an oil shock from looming EU sanctions; stop the sale of that oil from financing the war in Ukraine; and use relatively cheap Russian oil to provide partial compensation to Ukraine to address the damage that Putin’s brutal war has caused.

Copyright: Project Syndicate, 2022.

About
Michael R. Strain
:
Michael R. Strain is Director of Economic Policy Studies at the American Enterprise Institute.
The views presented in this article are the author’s own and do not necessarily represent the views of any other organization.