Oil tanks at the Volodarskaya LPDS production base in the village of Konstantinovo in the Moscow region on June 8.
Photo: MAXIM SHEMETOV / Reuters
The United States and Europe are fighting for ways to stop funding for Vladimir Putin’s military machine without sending their economies into recession. The latest idea proposed at this week’s G7 summit is an oil price cap. This will work like most price control gambits, which means it probably won’t.
Despite Western efforts, revenue from the Kremlin’s oil exports has risen since the invasion of Ukraine. The United States has banned the import of Russian oil, and the European Union recently agreed to suspend it this year, with exceptions for pipeline supplies to Hungary, Slovakia and the Czech Republic.
Still, China and India are happy to buy Russian oil at a discount of $ 30 to $ 40 a barrel. European sanctions, which take effect in December, will also ban shipping insurance, which could have a greater impact. But before those sanctions have a chance to work, G-7 leaders are now seeking to undermine them.
This week, they agreed to study an upper limit on oil prices, which would create an exemption from shipping insurance sanctions for buyers who buy crude oil below a certain price. The idea is to create a cartel for the buyer that would force Russia to accept a price slightly higher than its production costs, which could be about $ 10 a barrel.
It is assumed that then China and India will have no incentive to undermine sanctions. Price restraint may also keep Russian oil flowing to world markets, so the United States and Europe will experience less economic pain. This will also eliminate the risk of sanctions forcing Russian producers to close wells, which could stifle long-term supply.
At least that’s the idea. Finance Minister Janet Yellen stubbornly flogged the plan as an alternative to Europeans’ import bans and insurance. The Biden administration worries that European sanctions, if given time to work, could harm Russia’s oil industry and keep oil prices high even after the end of the war in Ukraine.
The first problem with the price ceiling is that it will require Mr Putin’s cooperation. He may refuse to sell crude oil at the price demanded by the United States and Europe. Russian producers would not necessarily be forced to limit production, as Mr Putin could find customers like China and India willing to take Russian oil at a price that still allows the Kremlin to profit.
Thus, the plan will also require the cooperation of China, India and other countries that do not care whether Russia wins in Ukraine. There is also a chance that Putin will retaliate by cutting exports, which could lead to soaring world prices. A self-embargo would hurt Russia’s oil industry, but Mr Putin is not above the hen game with the West.
Price cuts will also require a review of European energy sanctions and will give Hungarian Prime Minister Viktor Orbán another opportunity to ease them. Do European leaders want to risk their stubborn unity?
A better way to reduce Mr Putin’s influence on oil and gas is to increase Western supplies, which G-7 leaders seem unable to do. British Prime Minister Boris Johnson has hit energy companies with a tax on unforeseen profits that will discourage investment and production in the North Sea.
The Biden administration continues to impose more regulations to limit oil and gas production in the United States, while threatening companies if they do not take action to reduce gasoline prices. At least this week, G7 leaders agreed to reconsider their previous commitment to cut off funding for fossil fuels abroad, which is crucial for Europe to give up Russian gas.
However, the White House opposed this when it was circulated. “Our position last May was – and the president was clear – that he did not think these investments were the right course of action,” National Security Council spokesman John Kirby said on the way to the summit. “I don’t know of such a change in this policy.”
The bigger truth is that sanctions will not stop Putin’s military plans, at least not soon. Wars are won by military force. The way to speed up the end of the war is by giving Ukraine all the necessary weapons as quickly as possible. To adapt Winston Churchill, maybe Europe and the United States will do the right thing after trying everything else.
Political cuts: The gas tax holiday is another way to divert attention from one of the contributing factors to inflation: a hasty transition to green energy. Images: AFP / Getty Images Composite: Mark Kelly
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Appeared in print on June 29, 2022.
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