Cover Russia’s oil price now to avoid recession

Michael R Strain is director of economic policy studies at the American Enterprise Institute

Although the price of oil has fallen in recent weeks, it is still going through the roof, seeping into gas prices and causing economic and political challenges in the US, UK and Europe. An increase in Russian supply would lower prices, but the revenue from those additional sales would feed President Vladimir Putin’s war machine.

Adding to the problem is a new round of European sanctions that will target Russian oil imports later this year. Such sanctions could further increase prices, potentially triggering a global recession.

US Treasury Secretary Janet Yellen has proposed a solution: allow Russia to continue exporting oil, but impose a cap on the price Russia can charge. This would help control oil prices while ensuring that the US and its allies do not fund Russia’s war in Ukraine.

The plan would halt Russian seaborne exports by denying Russian oil exporters the insurance they need to underwrite tankers unless Russia agrees to sell its oil at the maximum price. Without insurance, ships carrying Russian oil exports would be unable to access crucial international waterways.

The UK and Europe are in a position to exert considerable influence. According to the Clean Air and Energy Research Center, 68% of Russian crude deliveries this spring relied on EU, UK and Norwegian vessels. Almost all tankers were insured in the UK, Norway or Sweden.

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If all goes according to plan, Russia would still sell the oil, because the maximum price would be set just above the marginal cost of production. It would still make economic sense for Russia to continue producing, but there would be little benefit to financing the war. The extra oil would help put downward pressure on world prices.

Of course, not everything may go as planned. Russia could retaliate by cutting off its oil or natural gas exports, causing serious damage to many US allies and global markets. Russia would bet that it could endure the economic pain longer than countries that depend on its energy exports. Or it could avoid the cap by offering to sell its oil to countries for more than the maximum price but less than its open market price.

Something similar is already happening under the existing sanctions regime: China and India, for example, buy oil from Russia at a discount of about $30 a barrel.

Still, the limit should be implemented. By not producing, Russia could inflict lasting damage on its oil wells, which it would try to avoid. Similarly, Russia would be reluctant to burn off its natural gas rather than sell it. Russia may retaliate, but tighter control of Russian energy revenues gives Western countries more ammunition to respond, not less. Money for peace.

Even if the cap doesn’t reduce gasoline prices much, or if some countries — like China and India — refuse to comply, it would still put downward pressure on oil prices and reduce the risk that the next round of European sanctions could trigger an energy price shock that would reverse the global economy.

One idea worth exploring would be to require countries that buy Russian oil below the price cap to impose a tariff. Some of the revenue from this tax could be sent to Ukraine to help it rebuild. In the US, this would require Congress to reverse its ban on Russian oil imports.

This would be a major political challenge for President Joe Biden’s administration. It would be equally difficult for other governments. But it would allow the price cap to advance three goals, not just two: keep Russian oil flowing to avoid an oil shock due to looming EU sanctions; stop the sale of that oil to finance the war in Ukraine; and using relatively cheap Russian oil to provide partial compensation to Ukraine for the damage that Putin’s brutal war has caused.

This article was published by Projects Union



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About the Author: Chaz Cutler

My name is Chasity. I love to follow the stock market and financial news!