Munich-President Biden is leading efforts to manipulate oil markets on a scale rarely seen in the world, using cartel-like tactics in aggressive but dangerous attempts to undermine Russia’s war effort in Ukraine. I am incorporating it.
In a group of seven countries this week in the Bavarian Alps, Bavarian assembled an upside-down version of OPEC, the world’s most powerful oil cartel, with the goal of calming consumers burned by petrol pumps. I tried. Allies give way and help accelerate the end of the war.
Biden minimizes how much profit from each barrel a particular seller, Moscow, rather than limiting supply to maximize profits in a country that sells oil like a cartel. I’m trying to suppress it. He led a group of seven counterparts on Tuesday and agreed to plans to limit Russian oil prices as a way for President Vladimir Putin to reduce the income he earns from his most important exports.
“Some people call it reverse OPEC,” said Simon Johnson, an economist at the Massachusetts Institute of Technology, who is involved in the discussion of how such a cap works. .. “This is a cartel trying to distinguish Russian oil from other oils, creating wedges that may or may not push global prices down.”
The plan was the invention of an economist, specifically Janet L. Jellen, Secretary of the Treasury and former chairman of the Federal Reserve Board, and was not completely burned down. Italy’s Prime Minister Mario Draghi urges Europe to adopt similar price caps for Russia’s imports of natural gas, as it is theoretically so powerful.
Some energy experts are wondering if price caps will work if negotiators can even agree on how to structure and implement it. There are many potential problems: Big Russian oil buyers like China and India may refuse to play with them. Putin could decide that it would be more advantageous to block some wells in Russia, pull more than a million barrels a day from the global market, and create a shortage that would further boost prices.
But officials from the Biden administration argue that the plan is the best chance to steal cash for Putin’s war effort and perhaps ease the pain of American drivers.
“Limiting Russia’s oil costs will put downward pressure on global energy prices,” Yellen said in a news release. “In a way that reduces the impact of Putin’s war on the U.S. economy.” Stated.
To understand why Western nations have settled on this complex and untested idea of their latest attempts to counter both Russia’s invasion and rising inflation that has overwhelmed global consumers. It helps to revisit the basic economics of.
A better understanding of the Russian-Ukraine war
After Russia invaded Ukraine, the United States and its allies moved to ban Russia’s oil imports in retaliation, hoping to block the main source of income for its war machinery. However, global prices soared accordingly, outpacing Russia’s decline in sales, and Moscow’s oil revenues continued to flow.
That price surge is one of the things that can happen when oil producers collectively decide to withdraw supply from the market. Those producers are leveraging the great power of the market to effectively select the best price for them. Its price is higher than the efficient market sets. Consumers are suffering from the consequences.
Group 7 is trying to do a similar show of market power, but in the opposite direction. The idea of price caps that the Minister of Finance must currently develop will try to keep Russian oil in the market to avoid further burdens on global supply and rising prices. Barclays, an analyst company, predicts that prices could reach $ 200 a barrel by next year if most of Moscow’s exports are knocked offline.
At the heart of the price cap is that the West, which currently controls much of the means and financing needed to ship oil, has formed a coalition of oil buyers and private companies in areas such as insurance and shipping. Ultimate to Moscow in essence: Sell oil at a significant discount or not at all.
In the best scenario, the end result will be published promptly, supported by a broad coalition of national and private companies. If traders expect Russian oil to continue to flow cheaper into the market in the near future, oil prices can fall sharply.
In the final statement of the summit, a group of seven leaders said, “Various approaches, including the possibility of a comprehensive ban on all services that enable the global transportation of Russian maritime crude oil and petroleum products.” Said to consider. Oil is purchased below the price agreed in consultation with international partners. “
After the meeting, French President Emmanuel Macron hoped to “not only release more quantities, but also better control oil and gas prices by coordinating discussions among major buyers.” He said he was.
The utter eccentricity of the plan-the opposite logic and allowing Mr Putin to simply stop exports to the West-is that the measures taken so far by the United States and its allies have made Russia’s war effort. It emphasizes the frustration that it feels unblunted.
There are many reasons why this effort may fail. Authorities are concerned with how many buyer countries need to sign on to ensure effectiveness, or at least not actively try to undermine the plan by doing a side deal with Russia. I can’t say it yet. They also can’t say how quickly the details can be put together, and how negotiators like Mr. Yellen can get the whole industry involved, such as oil tankers and marine insurance.
Political pressure can complicate details. Asked about price caps after the summit, German Chancellor Olaf Scholz said, “Very ambitious and demanding, reflecting the potential difficulty of reaching an agreement on this idea among the 27 member states of the European Union. Is tough. “
Some analysts say that the very complexity that delayed a group of seven leaders from accepting plans could slow the market reaction that leaders want to design. ..
“Price cap policies will not expose Russia to the immediate financial stress that many expect,” said Mark Mozur, market analyst at S & P Global Commodity Insights, on Tuesday. “Also, the market cannot be expected to interpret the potential caps as the Biden administration desires.”
Perhaps the most basic danger is that the leader sets the wrong price limit. This could not minimize Putin’s profits and could push large amounts of oil out of the market. The political backlash in that case can be immeasurable. In the world of energy, it’s a familiar fear. Cartels are not always calculated correctly — and not as powerful as they might imagine.
The report was contributed by Melissa Eddie Garmisch-Partenkirchen, Germany, Aurelian Breeden From Paris and Alan Lapeport From Washington.