A cap on Russian oil could be coming — if Western allies can agree on a price
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A few months ago, we discussed how Western allies are considering a price cap on Russian oil transported by sea. Fast forward to today, and they’re still working on it.
An EU diplomat offered more specifics on Wednesday with mention of a target range of $65 to $70 per barrel.
The idea of a price cap on pretty much anything rubs a lot of economists the wrong way. Count among them Tom Seng, director of the School of Energy Economics at the University of Tulsa.
“Personally, I’m a free market person. I hate when governments intervene in the marketplace,” he said.
Still, Seng said he gets the push to place a cap on the price of Russian oil as a way to punish Russia, “because, yes — the oil revenue. We know a portion of it goes toward supporting their war with Ukraine.”
The idea behind a cap is to keep Russian oil flowing to the global marketplace while limiting Russia’s revenues, said Mark Finley, a fellow at Rice University’s Baker Institute.
“It’s an admirable thought but it looks like it’s actually shaping up to be pretty toothless in practice,” he said.
Toothless because a cap at, say, $65 to $70 a barrel probably isn’t far off from the discounted price Russia is offering its oil for anyway. That’s according to Ellen Wald, president of Transversal Consulting.
“If you want to cap it at say $50 or $40, that would be a more significant price cap and that will cut into Russia’s revenue more,” Wald said.
Some countries like Poland and Lithuania want a far lower cap — closer to $20 — which, by some estimates, is what it costs Russia to produce a barrel of oil.
But too punitive a cap could prompt Russian President Vladimir Putin, in an extreme scenario, to halt sales of Russian oil altogether, said Trey Cowan, an oil and gas analyst at the Institute for Energy Economics and Financial Analysis.
“That’s definitely their prerogative,” he said. “And since the markets are so interlinked, it would be really bad for the rest of the world.”
Such a move could drive oil prices higher as many economies are already slowing down.
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