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Prof. ST Hsieh

Director, US-China Energy Industry Forum

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June 27, 2022

Ukraine war is entering the fifth month and no end is insight. Now G7 is floating the idea of price cap on Russian Oil with the objective of crippling Russian economy and surrender asap. But so far US led plan to pile pain on President Vladimir Putin, forcing him to reconsider his war in Ukraine, hasn’t worked. On the contrary, Russian is making more money than before the war and sanction. Worst, European nations are suffering energy crises and sinking the global economy along the way! Should any of the smart leaders and strategists explain to us what went wrong and what kind of lessons have learned?

Now a senior US administration official told CNN that “The goal here is to starve Russia, starve Putin of his main source of cash and force down the price of Russian oil to help blunt the impact of Putin’s war at the pump.” In one breath, this senior US administration official actually laid out three goals:

A. Starve Putin of his main source of cash,

B. Force down the price of Russian oil,

C. Blunt the impact of Putin’s war at the pump. (It is good for US!)

It is smartly said, but it is also the same promises of the now failed sanction strategy. These three goals are not mutually exclusive, but they are also not mutually cumulative. It is well understood that the high pump price in the US has more to do with the domestic refining capacity than crude oil price.

US has been lobbying this price cap at the G7, but “key details remain murky” means no planning on how it may work or when it will start. It is noted that “It would also need broad international support to be effective.” Without any details, how and who will be able to work on getting the “broad international support?”

All the while, war rages on and Ukraine is losing territory. Should any real smart US senior administrator be working on ending the war?

Price cap on Russian oil could shake up the market

London (CNN Business) Europe and the United States have barred the import of Russian oil to cut off a crucial revenue source for the Kremlin. But the plan to pile pain on President Vladimir Putin, forcing him to reconsider his war in Ukraine, hasn’t worked.

Russia’s government is making just as much money from energy exports as it was before the invasion. Meanwhile, inflation is surging globally, adding to political pressure on heads of state such as US President Joe Biden, British Prime Minister Boris Johnson and French President Emmanuel Macron.

That’s forcing leaders from top economies who have gathered in Germany for a G7 meeting to consider a new route: slapping price caps on Russian crude.

“The goal here is to starve Russia, starve Putin of his main source of cash and force down the price of Russian oil to help blunt the impact of Putin’s war at the pump,” a senior US administration official told CNN.

Why it’s needed: European customers have pared imports from Russia even before the bloc’s partial embargo takes effect. But an uptick in exports to Asia has helped make up for a large chunk of those losses. China — taking advantage of huge price discounts — imported 2 million barrels of Russian oil per day last month for the first time. India’s imports also spiked, hovering near 900,000 barrels per day in May.

Russian oil export revenues increased by $1.7 billion in May to about $20 billion, according to the International Energy Agency. That’s well above the 2021 average of roughly $15 billion.

The United States could punish countries that continue to do business with Russia. But that would cause further chaos in oil markets, something leaders are desperate to avoid as gasoline prices remain close to record highs.

If China and India had to find replacements for Russian crude, the price of oil could easily top $200 per barrel, Darwei Kung, portfolio manager for commodities at DWS, told me. It’s currently trading above $112 per barrel.

With price caps, barrels of Russian oil could theoretically still make their way onto the global market, thereby avoiding a further supply crunch — but Moscow wouldn’t be able to keep raking in hefty profits.

The Biden administration has been lobbying for this option in recent days, and German officials have indicated an openness to discussing it. But key details remain murky.

What’s missing: How, when and by how much the price of Russian oil could be capped remains to be seen. Officials said the precise mechanism for accomplishing the cap was still being worked out. It would also need broad international support to be effective.

One method could be barring companies based in G7 countries from providing insurance for oil cargoes if buyers paid above a certain price.

Still, Kung warned that adding complexity to energy markets could heighten friction and make transactions more difficult, driving prices higher than they would be otherwise.

“The more complicated the system is, the more likely there are challenges for it,” Kung said. “[The] market system works because in a way it’s very simple. It’s very efficient.”

The Leaders of Rich Countries Need to Stop Making Promises, and Start Making Plans

COMMENTARY

By Masood Ahmed June 25, 2022 3:00 am ET

About the author: Masood Ahmed is the president of the Center for Global Development and a former senior official at the International Monetary Fund and the World Bank.

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