US and its allies seek to limit Russian energy prices to prevent an invasion

The United States and its allies are working on new measures to starve the Russian war machine while also preventing the price of oil and gasoline from skyrocketing to levels that could crush the global economy. Thousands of sanctions have already been placed on Russia to flatten its economy.

Oil, the main source of income for the Kremlin, has managed to keep the Russian economy afloat in spite of export restrictions, sanctions, and the freeze of central bank assets. By the end of this year, American allies in Europe intend to follow the Biden administration’s lead and take steps to stop using Russian oil. According to some economists, this move could result in a reduction in the global oil supply and raise prices as high as $200 per barrel.

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Because of this risk, the United States and its allies are attempting to create a cartel of buyers to set the price of Russian oil. The leaders of the Group of Seven have provisionally agreed to support a restriction on the price of Russian oil. Simply put, member nations would consent to buying the oil at a cheaper price than the market.

High oil prices are already putting pressure on economies and raising the possibility of rifts among nations that are protesting Russian President Vladimir Putin’s invasion of Ukraine in February. While governments in the United Kingdom, Germany, and Italy are grappling with the economic havoc created by trying to move away from Russian natural gas and petroleum, President Joe Biden has seen his public approval slide to levels that undermine Democrats’ chances in the midterm elections.

The goal of the cap is to reduce gas prices for consumers and contribute to the end of the conflict in Ukraine. To promote the idea, Treasury Secretary Janet Yellen is currently travelling to the Indo-Pacific region. In a joint statement released on Tuesday in Japan, Yellen and the Japanese Finance Minister Suzuki Shunichi stated that the two nations had decided to investigate “the viability of price limits where appropriate.”

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It will be necessary to gain the support of China and India, two nations that have continued to do business with Russia despite the conflict. The administration is optimistic that China and India, who already purchase goods from Russia at a discount, will support the idea of price ceilings.

Wally Adeyemo, deputy secretary of the Treasury, told The Associated Press, “We believe that ultimately countries across the world that are currently buying Russian oil will be extremely interested in paying as little as possible for that Russian oil.”

Several eminent economists support the Russian price ceiling proposal. According to a tweet by Harvard economist Jason Furman, if the strategy is successful, it will maximise harm to the Russian war machine while minimising damage to the rest of the globe. Additionally, David Wessel of the Brookings Institution referred to abandoning the price cap idea as a “unpleasant alternative.”

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Oil prices will almost surely increase if a price cap is not put in place as a result of the European Union’s decision to forbid almost all oil from Russia. By the end of the year, the EU also intends to forbid funding and insuring the maritime transportation of Russian oil to outside parties.

Without a mechanism to restrict prices and lower some Russian income, “The possibility of some Russian supplies leaving the market would increase. That might result in increased costs, which would raise costs for Americans, “Added Adeyemo.

According to a June Barclay’s analysis, if the majority of Russia’s seaborne exports are hindered by the EU oil embargo and other limitations, the price of oil may soar to $150 per barrel or perhaps $200 per barrel.

On Tuesday, the price of a barrel of Brent crude was little under $100.

Any price ceiling scheme will need China and India’s cooperation, according to James Hamilton, an economist at the University of California, San Diego.

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“Getting people to agree is a difficult diplomatic challenge on a global scale. Getting the United States to stop purchasing oil is one thing, but if India and China continue to do so, “Hamilton told the AP that at high prices, “there’s no impact on Russian earnings.”

“The less money Russia has to spend on these bombs against Ukraine, the less money it makes from selling oil, “added he.

In a news briefing on Monday, Jake Sullivan, Biden’s national security advisor, said: “If it turns out that countries are imposing their own price caps and it is a significant loss of revenue to Russia in terms of their ability to export oil, that is not the failure of sanctions. The fact that economic pressure is reducing Moscow’s earnings shows how effective it has been.

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One alternative for retaliation is for Russia to remove their oil from the market entirely.

Christiane Baumeister, an economist at the University of Notre Dame who specialises in the dynamics of energy markets, stated that in such a scenario, “the important question is will countries have enough time to discover alternatives” to prevent significant price hikes.

A Russian price control plan would probably need to be in place and functioning properly with five months left in the year before EU bans start to take effect in order to prevent further increases in petrol prices that have irritated American drivers. Biden has cautioned that this summer’s high gas prices are the price of containing Putin, but prices could reach new highs and cause the president economic and political hardship.

Without the price cap, the effects “would be transmitted onto consumers through gasoline prices if the EU import ban goes into place coupled with the insurance prohibition,” according to Baumeister.

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