Many reasons why Russia’s oil export price cap can’t work : Peoples Dispatch
In its ongoing economic war against Russia, the United States and its allies are proposing a price cap on Russian oil exports. The idea of oil price caps promoted by US Treasury Secretary Janet Yellen suggests that oil-consuming nations organize themselves into a cartel of buyers to limit Russia’s revenue from oil exports. This proposal follows previous measures against Russia, which have not dented its economy to the point of inducing it to change its posture (as desired by the United States and its allies) regarding the conflict in Ukraine.
Instead, direct restrictions on Russian exports, mostly of raw materials such as oil and natural gas, have raised their world prices. They are so high that Russia’s export earnings have increased even though the volume of some exports has decreased.
Russia currently accounts for around 10% of the world’s oil, producing around 10 million barrels per day. Of these, Russia exports about 7 million barrels per day. If its exports decline, the resulting mismatch between supply and demand will push speculators (mainly international finance) to drive up oil prices to astronomical levels. Therefore, the proposed price cap, according to the intentions of the United States and its allies, is supposed to work by reducing Russian oil export revenues without reducing their magnitude.
Let us examine in detail the plan of the United States and that of its “allies”. First, the ceiling price for Russian oil exports will be at a level above the cost of producing oil but below world oil prices. Second, the cap is meant to be enforced primarily through controls on marine insurance dominated by US-based companies or its allies. This would be with the expectation that if the price cap is successful, world oil prices and traded oil volumes will remain relatively stable, but Russia’s oil export earnings will decline.
If this decline is significant enough, the United States and its allies can expect Russia to alter its position in the conflict in any way it deems acceptable. However, these hopes are unlikely to be realized for several reasons.
The United States has failed to convince OPEC to increase oil production, in part because of capacity constraints in the coming years. Moreover, the United States currently lacks the strategic means (the “unipolar moment” has passed) to “persuade” OPEC members such as Saudi Arabia to activate their limited reserve oil production capacity. Now, Iranian oil exports are part of global trade but outside the so-called rules-based international order due to unilateral US sanctions. Venezuelan oil production is also limited by years of unilateral US sanctions. In both countries, the significant increase in production capacity will require years of investment. Moreover, their oil exports will be more expensive for European buyers than Russian oil due to higher transportation costs.
This is why Russian oil exports are irreplaceable in world trade for years to come.
Let’s also consider the likely consequences of attempts by the United States and its allies to impose a price cap on Russian oil exports. First, it will require a cartel of most actual and potential importers of Russian oil. China and India have effectively ruled out participating in such an exercise, using different idioms to articulate their reasoning. China is unlikely to agree to a negotiation that would strategically weaken Russia (the possible outcome if a price cap is effective) as this would be detrimental to China’s strategic position vis-à-vis the United States.
If India agrees to join this proposed buyer cartel, there could be at least two negative consequences even if the price cap is effective. First, it could undermine India’s defense capability, which is disproportionately dependent on Russian imports. Second, it could strengthen the strategic proximity between China and Russia. This proximity could become antagonistic to India’s interests. The strategic proximity to the United States may not offset it in the future.
Second, Russia could respond to attempts to impose a price cap by partially withholding its oil exports, which would cause global oil prices to rise. If Russian oil prices are below world market prices but above the proposed ceiling, some countries will find it useful to import Russian oil. It has been argued that the shutdown of oil production may require repairs when production restarts. These expenses could dissuade Russia from partially reducing its oil production.
However, this would only be true if the difference between Russia’s revenue from oil exports (when selling at an intermediate price between world prices and capped prices) and the cost of restarting temporarily unused oil wells was lower than the revenue from oil sold at the capped price. the price. If global oil prices rise enough due to partial oil production shutdowns, it would be worth Russia refusing to export oil at the capped price.
Third, other countries that export oil or related commodities will rightly view the success of the price cap as a strategy that the United States and its allies can use against them if they deviate from “the rules-based international order”. Therefore, they are unlikely to want to cooperate with the price cap idea. Moreover, if Russia exports all of its oil at the capped price, as long as it is below world oil prices, any adjustment of oil supply to demand will only affect non-Russian oil producers.
The increased volatility in the revenues of non-Russian oil-exporting countries would make them unwilling to cooperate with the proposed price cap.
Fourth, it is unclear how US-based marine insurance companies (and their allies) can monitor the actual price at which Russian oil is exported. Suppose a country imports fertilizers and oil from Russia. The difference between the actual Russian oil price and the capped price could be documented as part of the transaction value of fertilizer exports. In addition, insurance companies in Russia or in countries that import oil from it can provide insurance. This should not be very complicated since the marine insurance companies in the United States or its allies mainly provide the “expertise” and are not the source of the premiums. It is also possible that oil traders will “mix” oil from Russian and other sources and label it as non-Russian to operate outside the scope of any price caps. In addition, they could use mid-ocean ship-to-ship oil transfers to mark Russian oil as coming from other places, making the price cap inapplicable to such cargo.
Fifth, it is not militarily possible for the US Armed Forces to seize vessels carrying Russian oil exports, as this would result in massive retaliation from the Armed Forces of the Russian Federation.
Sixth, Russia could retaliate against attempts to impose price caps on its oil exports in many ways other than cutting production. For example, contrary to mainstream media reports, Russia could step up its military activities in Ukraine without using nuclear, chemical or biological weapons. The government of the Russian Federation might conclude that the negative fallout from a military defeat against Ukraine using overwhelming conventional force is less than if it allowed itself to be bound by a price cap.
Resisting attempts to impose the price cap by abandoning the relative restraint of its armed forces would lead to a sharp increase in the number of victims and an influx of refugees from Ukraine to Europe and the Russian Federation. The latter may calculate that a rapid end to the armed conflict will alter the “cost-benefit” calculations of the United States and its allies, making the price ceiling proposed lose its raison d’être.
Seventh, Russia is one of the main exporters of raw materials. It could institute selective commodity export restrictions against countries seeking to enforce price caps. If these restrictions relate to grains, fertilizers, etc., it could greatly aggravate the global food crisis.
So we have a high likelihood of Russian retaliation, a reluctant India and China, the inability to substitute Russian crude and gas, and unilateral sanctions increasing rather than diminishing Russian profits. The proposed oil price cap does not seem attractive to those proposing it. This will likely be a strategic setback for the United States, primarily reflecting a fundamental feature of contemporary international political economy – it is not strategically possible for the United States to successfully wrestle with China and Russia simultaneously.
Shirin Akter is Associate Professor, Department of Economics, Zakir Husain Delhi College, University of Delhi. C. Saratchand is a Professor in the Department of Economics, Satyawati College, University of Delhi. Opinions are personal.