Capping Russian oil prices is worth trying

A proposal by the Group of Seven to impose a price cap on purchases of Russian oil is so neat that it’s been derided as an academic parlor game. Can the world’s wealthiest countries really reduce Moscow’s revenue while keeping crude flowing into global markets?
As it happens, the answer is probably yes. The plan has plenty of flaws, but it’s the world’s least-bad option for curtailing Russian President Vladimir’s Putin ability to wield energy as a weapon.
The problem the G-7 is trying to solve is simple enough. Sanctions imposed on Russia for its invasion of Ukraine, combined with retaliatory action, have driven up global energy prices. That means that even if Moscow sells less to the developed world, it’s making more than enough selling to ostensibly neutral countries to keep its war machine going. Yet cutting off Russian oil exports altogether — as the EU’s latest sanctions package threatens to do come December — would drive costs even higher. In a tight market, the world can’t fill the gap left by Russian crude, which made up close to 13% of global exports in 2021.
A cap works around that constraint. It allows Russia to sell, but only at a level set just above an estimated incentive price. However much that may rankle Putin, the argument goes, Moscow is too dependent on hydrocarbon rents to simply turn off the taps.
Some potential pitfalls are already clear. Putin has said the country “will not supply anything at all if it is contrary to our interests” and threatened instead to “freeze the wolf’s tail.” His willingness to curb gas exports gives that threat some credence, as does the “partial mobilization” of up to 300,000 reservists he announced on Wednesday. He continues to expect that Russia can hold firm for longer than Europe can hold together. Analysts at Goldman Sachs and elsewhere argue Russia can withstand at least a temporary shut-in, while a cap may prove easy to circumvent and hard to enforce. Not least, India and China won’t be joining in any such scheme.
All the same, it’s the right thing to do — and it could well work better than critics expect. As a start, for all Putin’s bluster, it won’t be easy to simply leave crude untapped. The regime runs on oil rents. Even if Putin wants to put his imperial aims first, an option the G-7 may be downplaying, those around him may see things differently. Many officials are already disconcerted by Moscow’s embarrassing strategic losses in Ukraine. Crucially, a significant cutback in oil exports risks becoming permanent in some regions, given maturing fields and the departure of Western oilfield services companies. Meanwhile, domestic social demands are only rising.
There’s also logistics. Russia doesn’t have sufficient storage to deal with long-term curtailment, nor does it have the tankers to get around a prohibition that cuts off Western services. That’s not a problem for China, but it leaves India, an opportunistic buyer, stuck.
Most important, even if India and China fail to sign up, by merely existing the cap can help anyway. It will drive up costs for Russia, particularly in transport and insurance, and create new leverage for buying nations. Instead of starting from the Urals crude price, talks will begin far closer to $50 a barrel, or wherever the cap is set. That’s already happening in India, where Russia is reported to be promising even deeper discounts as it competes for market share. Moscow has offered Indonesia oil at 30% below the market rate. Moreover, companies might well comply with the cap even if nations don’t.
—Bloomberg