The G7 Is Still Pushing Its Nutty Russia Oil Price Cap Idea

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Even observers who are generally very well informed but not strongly interested in finance are ridiculing the barmy idea of imposing a price cap on Russian oil sales. This move is perceived to be necessary because the other Western-devised sanctions against Russian energy sales, of first trying to embargo them, then realizing that that would amount to shooting too many economies in the head, then having what amounted to a partial embargo drive oil prices way up, made Russia fat and happy on lower petroleum sales.

This brilliant bunch, not having worked out that they are unable to anticipate obvious effects of their moves to pummel Russia, are doggedly trying to get a bad idea first floated by Mario Draghi, then touted by Janet Yellen, then taken up at the last G7 meeting, of imposing an oil price cap on Russia off the ground.

Mind you, the scheme should have been relegated to the dustbin by now. The only way something like this might have a dim possibility of success is if you got a very substantial majority of buyers to hang together. China already rejected the idea in particularly tart terms, expressing its hostility to the nerve of the G7 trying to insert itself in trade relations between Russia and China. Whoever wrote the Global Times editorial was having quite the go at the G7:

Yet, the problem is that G7 nations are no longer major buyers of Russian oil, and as an unrelated third party, the G7 has neither the qualification nor the market power to dictate energy trade among China, India and Russia.

Western media reports so far suggested that the West may impose such a price cap through insurance. About 95 percent of the world’s tanker fleet is insured through the International Group of Protection & Indemnity Clubs in London and some companies in other European countries. G7 could tell crude buyers that if they want to continue using the insurance service for Russian oil shipment, they need to agree to a “capped price.”

But even that could also fail to pressure Russia, as Russia has already prepared an alternative by offering insurance through the Russian National Reinsurance Company, according to media reports.

Even though tankers make a point of carrying insurance, as an insider pointed out, “All that does is give you the right to sue the insurer.”

Needless to say, China having taken such a forceful stand makes it easier for India and the Global South to say no, aside from the fact that they have other reasons to play nice with Russia (like fertilizer sales).

Oh, and another wee problem is in the highly unlikely event that the G7 were to get somewhere with this idea, Russia has made clear it’s not going along with the price cap. Goldman warned that prices could jump to over $200 a barrel and JP Morgan, as high as $380, if Russia decided to stare the West down and withhold supply. Deputy chariman of Russia’s security council, Dimitry Medvedvev, apparently follows Western analysts. From Reuters:

Russia’s former president Dmitry Medvedev said on Tuesday a reported proposal from Japan to cap the price of Russian oil at around half its current level would lead to significantly less oil on the market and could push prices above $300-$400 a barrel.

Commenting on the proposal, which was reportedly put forward by Prime Minister Fumio Kishida, Medvedev said Japan “would have neither oil nor gas from Russia, as well as no participation in the Sakhalin-2 LNG project” as a result.

Russia is restructuring the Sakhalin-2 LNG joint venture. Russia is the majority owner. Minority owner Shell has said it wants to sell its stake…and Russia cleared its throat, since Russia is not going to allow Shell to freely transfer a strategically important asset, particularly since the world has too many unfriendlies now. So Russia is requiring the minority owners Shell, plus Mitsubishi and Mistui, to reapply. The Japanese companies together own 22%.

The project is a critically important source of gas for Japan. Medvedvev is not threatening to cancel the Japanese supply contracts. But if the Japanese were kicked out as minority owners for behaving badly over oil price caps, it’s not much of a stretch to think that their supply agreements would not be renewed when their term is up.

Despite the obstacles described above, per a Bloomberg report yesterday, the G7 is still faffing about with the scheme:

The US and its allies have discussed trying to cap the price on Russian oil between $40 and about $60 a barrel, according to people familiar with the matter.

Allies have been exploring several ways to limit Russia’s oil revenues while minimizing the impact on their own economies in discussions that began in the run-up to the Group of Seven summit….

Biden administration officials are having multiple meetings a week on the price cap now, trying to push it into reality, one official said. The effort will intensify in the coming weeks, the official said…

While oil caps got a mention in the G-7 communique, there is a lot of skepticism that an agreement will be reached in the near future as the idea still needs fleshing out and there are a number of obstacles. Nevertheless, discussions are ongoing to try to nail down a concrete proposal.

Needless to say, the Twitterverse has been amusing itself:

And in the “be careful what you asked for” category:

You may have noticed that the Biden Administration is still pushing this idea. So sadly this may not be the last you hear of it.

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  1. SocalJimObjects

    Isn’t imposing a price cap on Russia the equivalent of imposing a price cap on the likes of Saudi Arabia as well? Who would buy oil from the Saudis at 100 if they can get it from Russia at 70?

    1. Lex

      And doesn’t it effectively become a price cap on the whole market? What happens to US and Canadian oil producers?

      Is the fundamental “idea” behind this that if Russia’s oil is price capped and the west continues to not buy oil from Russia that that will finally crush Russia’s economy? But as far as we all know, Russia is already selling loads of oil to China and India at a pretty steep discount and doing fine (unless this is offset by the higher world prices). IIRC, Russia’s budget is built on tax revenue from oil at $45/bbl so it would have to be price cap below that to cause real pain. But if oil is forced down to those levels and stays there long enough to hurt the Russian state (so we’d have to assume at least six months?) what does that do renewable energy investment?

      I’d like them to explain the mechanism whereby all other oil prices will remain higher than Russian prices. Without such a mechanism I’d think that the price cap would be the final nail in the coffin of the US shale industry and it might be enough to break the Canadian tar sands. Only the countries with super low production costs (like Russia) would be able to limp along. So when all the medium to high production cost oil sources go out of business, doesn’t that just leave Russia and a few ME producer nations standing?

      1. Chris A

        It seems obvious that the collective west is sufferring from a serious thinking disorder. Officials, and based on the nonsense I read , academics, think tankers, journalists and citizens, view the world as USA/NATO are superior and every utterance is perfectly thought out and properly assessed. Russia is inept and at our mercy. The west has lost all ability to see ALL possible outcomes and responses to their actions.
        I know it has been said before, but they seem to insist on making stupid mistakes and assumptions and then doubling down when it blows up in their faces

      2. Scylla

        I think the bulk of the oil sands costs are sunk at this point. Suncor (for instance) has their refining facility built, so unless they want to expand production, it is simply a mining operation, scoop sand up and dump it into the already existing and paid-for machinery, basically, which is not the expensive part. Possibly I am wrong and they still owe money on the refining facility, but it has been there for quite a while now. Totally agree on all other points.

  2. The Rev Kev

    When this idea first emerged, there was a rumour that if it worked, that it might be extended to all oil-producing nations as a way of bailing out old Joe’s midterm campaign. I’m sure that the rest of the OPEC nations sat up at that idea and there is no way that they will let this idea go ahead. But in the same way that nobody thought to ask Turkey what they thought about Finland and Sweden going into NATO, did Washington really sound out China and India first? Going by China’s take down, I would guess not. So what can Russia do? Easy. They could become the “Soup Nazi” of the oil world and tell those countries trying this ‘No oil for you!’ There are plenty of countries out there that need this oil so the only countries that would suffer would be the ones trying to shake-down Russia for break-even oil prices.

    And I think that there will be another knock-on effect, even if this idea comes to nothing. This post says ‘About 95 percent of the world’s tanker fleet is insured through the International Group of Protection & Indemnity Clubs in London and some companies in other European countries.’ I think that that is going to change now. In the same way that countries are getting nervous about having their wealth in western countries because of how Russia’s wealth was stolen, shipping nations may now be getting nervous about ship insurance and so may start looking for other places to insure their ships that are not located in London. So yeah, another own goal.

    1. ChrisRUEcon

      > This post says ‘About 95 percent of the world’s tanker fleet is insured through the International Group of Protection & Indemnity Clubs in London and some companies in other European countries.’ I think that that is going to change now.


      All this (price fixing) stands to do is deepen and hasten the emergence of a new multipolar world. Can’t wait for those new Eurasian marine insurance entities to start sprouting and shaking up Mr. Market … #Popcorn

  3. super extra

    I have been trying to look at the events of this year and especially this summer in a sort of clinical, historian’s-eye view of events (helps maintain calmness in the face of such insane stupidity). I’ve thought for a while that a lot of the very idiotic decisions made by the Biden admin could be explained by a combination of weak leadership, internal factionalism, and the end result of a bunch of old finance people past retirement age being forced to play courtiership games on top of being presented with genuinely historic crises. When dumb ideas like this keep resuming to the pile of options, I try to visualize the Thick of It-style sausage process behind the scenes. Who are the mid-level players? Are any of them aware of just how badly all of this is going to be seen by history going forward? Or is it just ‘a job’, a way to get the income to pay for the DC suburb house that is a requirement for knowing the ‘right’ people to play courtier games?

    1. Ashburn

      As a retired federal employee I know first hand the power of a suburban DC home mortgage to keep one from breaking too radically from the current political consensus.

      1. Glen


        Especially when dealing with these fly-by-night wankers that are going to get hired by a neo-con think tank after leadership in the agency realizes they are insane and get rid of them.

        And that assumes leadership didn’t come from the same pool of unflushable turds.

    2. ndk

      Let me preface this by saying that I agree with the above commentators and that I may simply be trying to rationalize idiocy. I’ve done plenty of work with alphabet agencies, the FRS, and more, but from a perch in academia. I met some very smart people in government. I really don’t like the broad, vague explanation of “because bureaucracy”, so here goes.

      I don’t think the decision-makers are the rank-and-file federal employees that are simply looking to survive in a system that thrashes violently in years that end in even numbers. They persist and they make perfectly fine salaries by Beltway standards, made lavish through our modern courtiers (since you went there) — lobbying, which is a nice way of saying bribery.

      These decision-makers have racked up a losing streak that would make the Washington Generals, the Globetrotters’ foil, blush. Almost every major political incident in the last twenty years has been destabilizing. Europe is no better: look at the Energiewende, or what’s become of France. Canada had the ugly spectacle of Trudeau, truckers, and bank accounts on ice.

      Japan has turned into the financier of the West by maintaining its 0.25% cap on interest rates, and it’s unclear how long they can maintain that for. Furthermore, Abenomics was the ultimate force behind QE in Japan. I worry that the tragic incident in Nara will have global consequence.

      Is it really possible that so many Western governments are so embarrassingly and consistently stupid and wrong, to the point where people across the political spectrum have lost faith in them? How? Why? If not, what else might be occurring?

      The events of the past decades have been catastrophic for the middle class and much of America. They have been very good to the top 0.1% and the power brokers they’ve bought.

      My wife is from China. I will not disclose the affiliation of her family and friends with the CCP other than to say that she turned down an invitation to join, which is rare and considered quite the affront to the inviter. She is of the opinion that President Xi is a ruthlessly effective political operator but not particularly bright, and I am of the opinion that Wang Huning is wicked smart and far from alone. I don’t see why there would not be similar systems elsewhere.

      I am not convinced there is no story behind the stories, and I am not convinced that such a story would be nefarious. Has the conclusion been reached that the Western global system as designed is ineffectual at modern scale in a modern world, and is the best way to transition from it is to demonstrate that as plainly as possible?

  4. ddt

    If I was Russia I’d add a tax on oil sold to the unfriendlies to further raise its price, and to rub it in their face, send a couple tankers to Sri Lanka for free.

  5. tegnost

    Hey, I have an idea!
    Why don’t they try this with healthcare and rent!
    OMG, i just thought of this, I’ll call my congresscritter right now,
    I’m sure they’ll be happy to hear from me…

    1. ChrisPacific

      Why stop there? We could announce a cap on atmospheric carbon concentration, and solve climate change! We’d all agree not to breathe the air unless the carbon level was at or below the capped value.

  6. James McFadden

    Putin is playing chess – thinking 6 moves ahead.
    Biden thought it was checkers – and no one bothered to tell him.

  7. ndk

    I fully agree with Yves’ commentary here. However, there is a great number of barmy ideas going around in the West right now. Amputating Russia from SWIFT was about as sane as this oil price cap idea. See the partner post from 07/07 about the FBI, MI5 and China. We’re decades into farcically inconceivably blunders and busted ideology by now.

    Wouldn’t you have learned? “Ascribe not to malice that which can be explained by incompetence” is a fine rule of thumb in many affairs, but in my experience, people do not achieve stations of real authority without being pretty competent. I’m not referring to figureheads.

    John Perkins, remarkably, was able to tell his story of being an EHM, though I’m sure there were omissions and concessions involved in the end bribe. A foreboding quip from his 2004 work:

    “Some would blame our current problems on an organized conspiracy. I wish it were so simple. Members of a conspiracy can be rooted out and brought to justice. This system, however, is fueled by something far more dangerous than conspiracy. It is driven not by a small band of men but by a concept that has become accepted as gospel: the idea that all economic growth benefits humankind and that the greater the growth, the more widespread the benefits….

    [It has] brought us to a point where our global culture is a monstrous machine that requires exponentially increasing amounts of fuel and maintenance, so much so that in the end it will have consumed everything in sight and will be left with no choice but to devour itself.”

    Put differently, I am not convinced that the collective think tanks and governments of the West are this stupid and incompetent. The most parsimonious explanation I have is that they are trying to engineer a transition in governance strategy and mechanism as gracefully as they can by having people lose faith in the current system.

    What’d be next? I can’t imagine, but I don’t fear it in my situation. If this were malice, I think it would look lot more sinister. If it were incompetence, it wouldn’t look this absurd.

    1. 1 Kings

      “as gracefully as they can”.. Please sir.
      Think it’s more to do with their 6, 7th or 10 home on every freaking continent on this earth, and $100 million portfolios.
      Corruption does not go away by itself, unless you count what the Mongols did to Baghdad 800 years ago…

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