Russian oil is getting a $60 price cap. Is that a good idea?
Today the EU’s price cap on Russian oil goes into effect, capping the price of Russian oil at $60. The idea is to rob Russia of oil exporting earnings while making sure not to upset the global oil market. The idea is clever but I doubt it will have much of an effect. I have two issues with the policy, the first is related to my long-standing fear of escalation, and the second is that I think the West values its economic and regulatory power far too highly.
As I keep repeating on the blog, escalation is not an orderly, managed process but fraught with emotion and reactivity. Maybe the Russians think an oil price cap is a proportionate and reasonable response. Maybe they find it to be an escalatory provocation. I don’t know. But that’s the point: we don’t know how Moscow will interpret the price cap so it remains to be seen whether it was provocative or not. As I’ve said plenty of times before, escalation is more about how your adversary interprets your actions than about your intentions. The EU found it provocative when the Russians cut off natural gas exports. Why shouldn’t they feel provoked when we use energy against them?
Speaking of the Russians cutting off gas deliveries to Europe, I think that’s a good model for understanding the oil price cap. The European winter has just started so it’s too early to evaluate precisely how effective cutting off gas was for Moscow. But from what I’ve heard and read it seems that the bark was worse than the bite. Columns sketching out doomsday scenarios of what a European winter without Russian gas would be like was rife before it became a reality. And now the consensus view has shifted from it being an unmitigated disaster to being tough and expensive but by no means impossible. US sanctions on Russia were talked up to be some sort of economic atom bomb before implementation, but while they did hurt they weren’t devastating. The oil price cap is likely to be the latest in a long line of economic sanctions or energy weapons which turn out to be far scarier than they ought to be. The real power in economic warfare is the threat. When that threat is exercised it often turns out to have been exaggerated.
All of this isn’t to say that the price cap is necessarily a bad policy. I think it would have greater value as a tool in a negotiation to achieve a diplomatic resolution to the conflict, than as a direct thorn in Russia’s side. Still, can’t fault the EU for using the tools it has to weaken Russia and ease the energy crisis.
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I've always been interested in politics, economics, and the interplay between. The blog is a place for me to explore different ideas and concepts relating to economics or politics, be that national or international. The goal for the blog is to make you think; to provide new perspectives.
Written by Karl Johansson
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Cover photo by Yuri Shkoda from Pexels, edited by Karl Johansson