The U.S. and Europe have been scrambling for ways to stop financing Vladimir Putin’s war machine without sending their economies into
recession. The latest idea, advanced at the G-7 summit this
week, is an oil price cap. This
will work as well as most
price-control gambits, which
is to say it probably won’t.
Despite Western efforts, Kremlin oil export
revenues have increased since the Ukraine invasion. The U.S. has banned Russian oil imports,
and the European Union recently agreed to
phase them out this year with exceptions for
pipeline deliveries to Hungary, Slovakia and the
Czech Republic.
Yet China and India have been happy to buy
Russian crude at a $30 to $40 a barrel discount.
European sanctions that take effect in December will also ban shipping insurance, which
could have a bigger bite. But before these sanctions are given a chance to work, G-7 leaders
are now angling to erode them.
This week they agreed to explore an oil price
cap that would create shipping-insurance sanctions waivers for buyers that purchase crude
below a specified price. The idea is to create a
buyer’s cartel that would force Russia to accept
a price a little more than its production costs,
which can be about $10 a barrel.
China and India would supposedly then have
no incentive to undercut the sanctions. A price
cap could also keep Russian oil flowing onto
global markets, so U.S. and Europe would feel
less economic pain. It would also obviate the
risk that sanctions could force Russian producers to close wells, which could suppress longterm supply.
At least that’s the idea. Treasury Secretary
Janet Yellen has been flogging the plan hard as
an alternative to the Europeans’ import and insurance bans. The Biden Administration worries that European sanctions, given time to
work, could damage Russia’s oil industry and
cause high oil prices to persist even after the
Ukraine war ends.
The first problem with a price cap is that it
would require Mr. Putin’s cooperation. He could
refuse to sell crude at the price the U.S. and Europe demand. Russian producers wouldn’t necessarily be forced to limit production since Mr.
Putin could find customers such as China and
India willing to take Russian
oil at a price that still lets the
Kremlin profit.
Thus the plan would also
require the cooperation of
China, India and other countries that don’t care if Russia
wins in Ukraine. There’s also a chance Mr. Putin
could retaliate by reducing exports, which
could send global prices sky-rocketing. A selfembargo would damage Russia’s oil industry,
but Mr. Putin isn’t above a game of chicken
with the West.
A price cap would also require revisiting Europe’s energy sanctions and give Hungary Prime
Minister Viktor Orban another opportunity to
weaken them. Do European leaders want to risk
their hard-fought unity?
The better way to reduce Mr. Putin’s oil and
gas leverage is to increase Western supply,
which the G-7 leaders seem incapable of doing.
British Prime Minister Boris Johnson has
slapped energy companies with a windfall-profits tax, which will discourage investment and
production in the North Sea.
The Biden Administration keeps imposing
more regulations to limit U.S. oil and gas production while threatening companies if they
don’t act to reduce gasoline prices. At least the
G-7 leaders this week agreed to revise their earlier commitment to stop financing fossil fuels
overseas, which is critical for Europe to wean
itself off Russian gas.
Yet the White House opposed this when it
was floated. “Our position last May was—and
the President was clear—that he did not feel
like these investments were the right course of
action,” National Security Council spokesman
John Kirby said en route to the summit. “I know
of no such change to that policy.”
The larger truth is that sanctions won’t stop
Mr. Putin’s war plans, at least not soon. Wars
are won by military force. The way to hasten the
war’s end is by giving Ukraine all the weapons
it needs as quickly as possible. To adapt Winston Churchill, maybe Europe and U.S. will do
the right thing after trying everything else