President Biden and Treasury Secretary Yellen have proposed a price cap on Russian oil as a way to cut off funding for Russia’s war against Ukraine. Despite existing sanctions on Russian oil exports, revenue to Russia has continued to increase due to rising oil prices. The proposed price cap aims to reduce the price that consuming countries pay for Russian oil.
However, many economists have pointed out that the price cap will not address the supply shortage issue. According to Daniel Ahn, a former chief economist of the U.S. Department of State, the proposed mechanism is likely doomed to futility as it ignores the realities of global oil markets. Ahn believes that the only way to significantly reduce Russian oil revenue is to boost Western oil supply and/or decrease Western oil demand, and an oil price cap does neither.
Gal Luft, co-director of the Institute for the Analysis of Global Security, also thinks the proposal is “ridiculous.” He says that the oil market is a sophisticated market, and you cannot force prices down. Daniel Wessel, director of the Hutchins Center on Fiscal and Monetary Policy, thinks the notion that oil-consuming nations should organize a buyer’s cartel to cap the price of oil “sounds fanciful.”
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Despite many nations agreeing to stop buying Russian oil, Russia is still selling huge volumes to India, China, and other energy-thirsty economies. Wessel wrote that the feasibility of the proposal rests on a fundamental misunderstanding of how global oil markets work. It is almost impossible to dictate any price that does not reflect supply-and-demand fundamentals.
Wessel noted that a European and British ban on financing and insuring tankers carrying Russian oil would take effect at year-end, which would curtail Russia’s export but also push world oil prices so high that a painful global recession would likely ensue.
Overall, there is plenty of well-justified skepticism surrounding the proposed price cap. While it may seem like a good idea in theory, many economists believe that it will not address the fundamental issues at play in the global oil market.
In conclusion, the proposal to cap the price of Russian oil has been met with skepticism from economists who believe that it will not address the underlying issues in the global oil market. While existing sanctions have not been enough to reduce Russia’s revenue from oil exports, a price cap is unlikely to make a significant impact. Instead, economists suggest that Western nations focus on boosting oil supply and decreasing oil demand if they want to reduce Russia’s oil revenue.
