The United States and its allies aim to cap Russian oil prices

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With thousands of sanctions already imposed on Russia to flatten its economy, the United States and its allies are working on new measures to starve the Russian war machine while preventing the price of oil and gasoline from skyrocketing. at levels that could crush the global economy.

The main pillar of the Kremlin’s financial revenue – oil – has kept Russia’s economy afloat despite export bans, sanctions and central bank asset freezes. America’s European allies plan to follow the Biden administration and take steps to stop their use of Russian oil by the end of this year, a move that some economists say could lead to lower global oil supply and push prices up to $200 a barrel. .

This risk causes the United States and its allies to seek to establish a cartel of buyers to control the price of Russian oil. The leaders of the Group of Seven have tentatively agreed to back a cap on the price of Russian oil. In simple terms, the participating countries would agree to buy the oil at a price lower than the market price.

High energy costs are already weighing on economies and threatening to drive rifts between countries opposed to Russian President Vladimir Putin’s February invasion of Ukraine. President Joe Biden has seen his public approval plummet to levels that hurt Democrats’ chances in the midterm elections, while leaders in the UK, Germany and Italy grapple with the economic devastation wrought by the attempt to move away from Russian natural gas and oil.

The idea behind the cap is to lower gasoline prices for consumers and help end the war in Ukraine. Treasury Secretary Janet Yellen is currently touring Indo-Pacific nations to lobby for the proposal. In Japan on Tuesday, Yellen and Japanese Finance Minister Suzuki Shunichi said in a joint statement that the countries had agreed to explore “the feasibility of a price cap, if any.”

However, China and India, two countries that maintained business relations with Russia during the war, will have to follow suit. The administration is confident that China and India, which are already buying from Russia at discounted prices, can be induced to adopt the price cap plan.

“We believe that ultimately countries around the world that are currently buying Russian oil will be very interested in paying as little as possible for that Russian oil,” Deputy Treasury Secretary Wally Adeyemo told The Associated Press.

The Russian price cap plan is backed by some leading economic thinkers. Harvard economist Jason Furman tweeted that if the plan worked, it would be a “win-win: maximizing damage to the Russian war machine while minimizing damage to the rest of the world.” And David Wessel of the Brookings Institution said an “unpleasant alternative” is not to attempt the price cap plan.

If a price cap is not put in place, oil prices will almost certainly rise due to a decision by the European Union to ban almost all oil from Russia. The EU also plans to ban the insurance and financing of the maritime transport of Russian oil to third parties by the end of the year.

Without a price cap mechanism to reduce some Russian income, “there would be a greater risk that some of the Russian supply would exit the market. This could lead to higher prices, which would increase prices for Americans “, said Adeyemo.

A June report from Barclay warns that with the EU oil embargo and other restrictions in place, Russian oil could reach $150 a barrel, or even $200 a barrel, if most of its maritime exports are interrupted.

Brent crude was trading Tuesday at just under $100 a barrel.

James Hamilton, an economist at the University of California, San Diego, said the participation of China and India would be important in enforcing any price cap plan.

“It’s an international diplomatic challenge on how to get people to agree. It’s one thing if you get the United States to stop buying oil, but if India and China continue to buy “at high prices”, “there is no impact on Russian income,” Hamilton told the AP.

“The less revenue Russia gets from selling oil, the less money it has to send these bombs to Ukraine,” he said.

Jake Sullivan, Biden’s national security adviser, said at a Monday press conference that “if countries are found to be imposing their own price caps and that’s a substantial denial of revenue to the Russia in terms of its ability to sell oil is not the failure of the sanctions, it is in fact the success of the economic pressure, because it lowers Moscow‘s revenue.

One possibility is that Russia could retaliate and pull its oil off the market altogether.

In this case, “the main question is whether countries will have enough time to find alternatives” to prevent massive price increases, said Christiane Baumeister, an economist at the University of Notre Dame who studies the dynamics energy markets.

With five months until the end of the year when EU bans begin to take effect, a Russian price cap plan should likely be in place and operating effectively to avoid further spikes in oil prices. gas that have frustrated American drivers. Biden warned that high gas prices this summer were the cost of shutting down Putin, but prices could hit new highs and spell economic and political hardship for the president.

Without the price cap, “if the EU import ban comes into effect with the insurance ban,” Baumeister said, the impacts “will be passed on to consumers through oil prices. essence”.

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