Can the G7 proposal for a cap on Russian oil prices work? | Business and Business News

As military fighting in the Ukraine war rages on, the parallel skirmish over energy continues to escalate, with the West announcing plans for price caps to try to curb Russia’s rising oil revenues to directly fund its expansion efforts.

The Group of Seven (G7), a group of the world’s wealthiest western nations, said at a recent summit in Bavaria that it was exploring the feasibility of capping Russian oil prices to prevent Moscow from recovering from the market price jumps caused by the invasion to benefit Ukraine.

The group includes most of Russia’s most vocal opponents, such as the United States, Germany and Britain, and said in a communiqué that it would seek to halt the export of Russian oil that was not bought at or below a certain price. While the details of such a dramatic proposal have yet to be outlined, the declaration’s political implications were heard loud and clear by a dismissive and skeptical Kremlin.

A price cap could work through a system to reduce or ban insurance or financing for Russian oil shipments above a certain amount.

Put simply, if a tanker agrees to take on a shipment of oil from Russia at a rate higher than the per barrel rate set by the G7, it will not be able to obtain the insurance and financial services necessary for the success of such a transaction are.

But one thing is clear, for such a move to work, the G7 would need to include countries outside of its membership — particularly large consumers of Russian crude such as China, India and Turkey — and it would need to find alternative producers to fill the G7’s blanks.

“It’s going to be challenging, it seems enforceable in Western countries, but internationally it needs others to get involved and that includes India and China,” said Timothy Ash, economist and associate fellow at London think-tank Chatham House. opposite Al Jazeera.

“One aspect of sanctions or such measures is the unintended consequences they have on global markets,” he said. Like all markets, there is to some degree the effects of demand and supply. Since the West consumes massive amounts of oil, it should technically have a say in pricing.

“But manipulation aside, the war in Ukraine could cause the world economy to experience such a slowdown that demand will effectively fall on its own. Oddly enough, stagflation could be the next weapon against Russian energy,” he added.

European Council President Charles Michel told reporters in Bavaria that G7 leaders would discuss a technical mechanism that would have the effect of an oil price cap through services related to oil and export insurance.

In response, Moscow has said any price cap plans would result in tightening in global oil markets and skyrocketing prices for European consumers.

“This is yet another attempt to interfere with market mechanisms, which can only lead to market imbalances,” Russian Deputy Prime Minister Alexander Novak said in a televised address last week.

“Threat and Reward”

So is such a move practicable – and even desirable given its possible consequences? And how exactly would it develop?

“It would effectively discourage financial institutions, particularly marine insurers, from shipping Russian oil unless the price of oil is below an agreed price,” said Benedict McAleenan, managing partner at Helmsley Energy and senior fellow at the Policy Exchange think-tank London.

“In theory, it’s a pretty elegant solution because it uses a threat and reward approach. The reward is a chance to buy even cheaper Russian oil. The threat is the prospect of sanctions and not being able to trade with big economies like the US and EU.”

And with such left-wing solutions, the question arises whether there is a precedent for such a scenario? “The Iranian oil sanctions,” McAleenan said, “which do a pretty good job of curbing Iran’s economy while allowing oil exports.” The 1995 oil-for-food embargo on Saddam Hussain’s Iraq is another example, albeit with logistical issues and problems with corruption.

But McAleenan said for this program to be successful, there must be a customer alliance. “It would effectively be a ‘monopsony’ – a dominant buyer or purchasing system that can set prices in the market,” he said. The idea reflects the more common concept of a monopoly or dominant seller like the Intergovernmental Organization of Petroleum Exporting Countries (OPEC).

“Monopsonia is found in many markets, such as in nationalized healthcare systems, and they can be very effective in driving down prices. But it can have all sorts of unintended consequences such as: B. the promotion of black markets and loopholes as well as market inefficiencies. And what if the price cap system suddenly collapses? You will see global price shocks,” McAleenan warned.

Discussing economic factors is one thing, but when dealing with a nation like Russia with a leader as unpredictable as Vadimir Putin, the implications could transcend markets and prices. Now how will it affect the political and diplomatic channels?

“Relations between Russia and the West cannot get much worse,” Natasha Lindstaedt, professor of government and international relations at the University of Essex, told Al Jazeera.

“Russia has previously demonstrated its brazen tactic of exporting gas to Europe. So it’s safe to assume that if the G7 tries to implement it, Russia will simply stop exporting to the West, or at least limit supply.

“Moscow knows it is making bulk revenue from selling other energy products to China and India and elsewhere. Putin is confident that it can survive and reduce exports of its products to Europe.”

A new supply system?

With oil being both a talisman of free market capitalism and a sector protected and controlled by a very powerful global cartel, analysts are skeptical that alternative suppliers to Western Europe can suddenly emerge.

Ash said: “I think there are overtures that happen behind the scenes. The natural alternative sources would be Saudi Arabia and the United Arab Emirates for Europe, but an entirely new supply system would take a lot of time – and there’s just no getting around the fact that much of Europe is dependent on Russia.

“And Russia knows what the alternatives are, whether it’s building new gas terminals, shipping oil from other producers, or switching to LNG, and it’s trying to fend them off. Putin is pumping just enough gas to keep Europe functioning, but also making sure it can’t stockpile.”

Perhaps Putin’s most frightening trait is his patience, seemingly ready to play a long and brutal game – which could mean his anger could be vented next winter on a colder Europe that needs heat and fuel, and consumers with absurd energy prices even if gas comes under a price cap scheme.

“I’m afraid it seems likely that prices will go up,” Ash said. “Unless we see a solution to Ukraine. The UK has its own energy to some extent, France has nuclear, Italy has some alternative sources, but is that enough?

“On the gas issue you have to look at the end of the pipelines – that is in Europe Spain, southern Germany, the Czech Republic, Slovakia and Austria – all these countries will have to make dramatic decisions about their stance towards Ukraine if Russia shuts down supplies .”

Lindstaedt added: “That is why Volodymyr Zelenskyy declared that the war must be over by January. There is concern that winter will create huge energy demand and Russia will have a greater advantage.”

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