The Kremlin’s mainstay of financial revenue – oil – has kept the Russian economy afloat despite export bans, sanctions and central bank asset freezes. European allies of the US plan to follow the Biden administration and take steps to end the use of Russian oil by the end of this year, a move some economists say could cause global oil supply to fall and push up prices up to 200 dollars a barrel. This risk has the US and its allies seeking to create a cartel of buyers to control the price of Russian oil. Group of Seven leaders have tentatively agreed to support a cap on the price of Russian oil. Simply put, the participating countries would agree to buy the oil at a below-market price. High energy costs are already straining economies and threatening rifts between countries opposed to Russian President Vladimir Putin’s February invasion of Ukraine. President Joe Biden has seen his approval rating plummet to levels that hurt Democrats’ midterm election chances, while leaders in the U.K., Germany and Italy grapple with the economic devastation caused by trying to distance themselves from Russian gas and oil. The idea behind the cap is to lower gas prices for consumers and help stop the war in Ukraine. Treasury Secretary Janet Yellen is currently on a tour of Indo-Pacific countries to lobby for the proposal. In Japan on Tuesday, Yellen and Japanese Finance Minister Suzuki Shunichi said in a joint statement that the countries agreed to explore “the feasibility of price caps, where deemed necessary.” However, China and India, two countries that maintained business relations with Russia during the war, should participate. The government is confident that China and India, which already buy from Russia at discounted prices, can be enticed to embrace the price cap plan. “We believe that ultimately countries around the world that buy 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 price cap plan in Russia has support from some leading economic thinkers. Harvard economist Jason Furman tweeted that if the plan works, 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 at the Brookings Institution said an “unpleasant alternative” is not to attempt the price cap plan. If no price cap is implemented, oil prices will almost certainly skyrocket due to the European Union’s decision to ban almost all oil from Russia. The EU also plans to ban third-party insurance and financing of Russian oil by sea by the end of the year. Without a price cap mechanism to reduce some Russian revenue, “there would be a greater risk that some of the Russian supply would be taken out of the market. This could lead to higher prices, which would increase prices for Americans,” Adeyemo said. Barclay’s June report warned that with the EU oil embargo and other restrictions in place, Russian oil could rise to $150 a barrel or even $200 a barrel if most of its seaborne exports are disrupted . Brent crude on Tuesday was trading just below $100 a barrel. James Hamilton, an economist at the University of California, San Diego, said that bringing together the participation of China and India would be important in enforcing any price cap plan. “It’s an international diplomatic challenge of how to get people to agree. It’s one thing if you get the U.S. to stop buying oil, but if India and China continue to buy” at high prices, “there’s no impact on Russian revenues,” 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 during a news briefing on Monday that “if it turns out that countries are imposing their own price ceiling and it’s a real denial of revenue to Russia in terms of their ability to sell oil, that it is not the failure of sanctions. This is actually the success of economic pressure because it reduces revenue for Moscow.” One possibility is that Russia could react and pull its oil off the market entirely. In that case, “the main question is whether countries 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 of energy markets. With five months until the end of the year, when the EU bans come into effect, a price cap scheme in Russia will likely need to be put in place and working effectively to avoid further gas price spikes that have frustrated drivers of the USA. Biden has warned that high gas prices this summer were the cost to stop Putin, but prices could rise to new records and lead to economic and political pain for the president. Without the price cap, “if the EU import ban goes into effect along with the insurance ban,” Baumeister said, the effects “will be passed on to consumers through gasoline prices.”
