“United against megalomania” is how a German newspaper put it succinctly.
Sanctions on Russian gold exports, the expansion of NATO’s intervention force to six times its current size, an air missile defense system for Ukraine and a broad commitment that the Group of Seven will be with Ukraine for as long as it takes.
None of these, achieved at this week’s G7 summit held high in the Bavarian Alps in weather ranging from bright sunshine to thundering thunderstorms, is not a paltry achievement.
But there was one idea that stood out, both because it’s new, divided the G7 and told a bigger story about the dilemma facing the West as it tries to harm Vladimir Putin’s war economy.
This is the proposal for a global cap on energy prices. The idea has simple appeal as it addresses two issues. This would bring energy prices back under some form of control, stifling consumers’ reaction to inflation. At the same time, it would slow the flow of Western funds to Putin’s war machine, which is largely dependent on gas and oil revenues provided by Western purchases.
Jake Sullivan, the US national security adviser, explained during a briefing that the West faced a dilemma. He had, by his own measures, reduced the amount of Russian energy he was buying, but due to the rising price of oil, revenues reaching Putin had not decreased accordingly. Russia is expected, according to economic intelligence firm Rystad Energy, to get at least $180bn (£147m). This is 45% more than in 2021 and 181% more than in 2020.
The solution is on one level disarmingly simple: refuse to pay as much as Putin and market demand. Such an idea, so contrary to free market principles, may seem like a Marxist silver bullet, but it is supported by Mario Draghi, the former president of the European Central Bank, and Janet Yellen, the director of the US Treasury. And it’s the brainchild of Washington academics.
Proponents, however, tout slightly different but not necessarily contradictory versions of the idea. Yellen mainly wants to impose a cap on the price of maritime oil, which will disproportionately affect Russia. Draghi thinks it is possible to go further by capping channeled Russian gas. In some respects, his idea has more potential since European consumption should not run out of steam so quickly.
Francesco Giavazzi, the Italian prime minister’s economic adviser, explained Draghi’s plan to the Guardian. He said: “Russian gas pipelines basically go in two directions: to Europe and – at the moment with a much smaller capacity – to China. A gas producer can slow the flow of gas, but he cannot stop it. Ultimately, if there is no flow, it will have to start burning gas in the air – which means burning dollars in the air. Putin could do it, but it would be very costly for Russia, politically too. »
Draghi, who tends to be vocal at summits on economic issues, explained, “We need to reduce the amount of money going to Russia and get rid of one of the main causes of inflation.”
The oil cap would theoretically work through a lever – insurance.
Almost 95% of the world’s tanker fleet is covered by the International Group of Protection & Indemnity Clubs in the heart of the City of London and by some companies based in mainland Europe. European nations have already agreed to end insurance for Russian oil shipments. Western governments could try to impose a price cap by telling buyers their insurance is available, but only so long as they agree to pay no more than a certain price for oil on board. In the papers that circulated at the G7, no figure is mentioned.
It was clearly a battle at the G7 for the United States to get Germany to commit to this idea, and they ended up with a classic compromise at the top to allow the technical experts to leave and study the idea.
The disadvantages of the oil plan are multiple. First, insurers may say they are being deprived of legitimate business for no good reason. Second, the EU may have to reopen existing, painfully agreed oil sanctions packages to approve the idea. This would require unanimity, and Hungary could again block progress towards cheaper oil. The EU is also expected to phase out oil purchases by the end of the year.
Third, Putin could say that if he is required to sell oil at marginal costs, he simply won’t sell. He has shown with gas that he is willing to give up some revenue by slowing down or turning off the taps to bully gas-dependent countries like Germany and Moldova. It may not be an economically rational response from Putin, but the Kremlin is not currently seen as a model of reason.
Finally, and most importantly, there is the question of whether oil-importing countries like India that are less committed to the war are willing to accept the project. On some level, they wouldn’t have a choice if they didn’t have shipping insurance. But India might also be positively disposed to the idea of getting an expensive commodity at a cheaper price. The price would be a matter of fine tuning.
Oil-producing countries such as Saudi Arabia may also not welcome this new market manipulation, fearing that if it works, it will set a precedent that puts oil-consuming countries in the driver’s seat.
Mark Mozur, market analyst for S&P Global Commodity Insights, said “the battle has already been lost, for this year at least” as Russia recorded strong revenues. “Russia’s brazen behavior in reducing gas flows to Europe should be seen in this context: it can very well do without the additional revenue.
What seemed intriguing ideas in meeting rooms high in the Alps might yet appear as world leaders clinging to straws. On the other hand, believing that oil markets are free is foolishness. They’re riddled with cartels, and maybe it’s time consumers got one too.