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G-7 Agrees to Cap the Price of Russian Oil Using a Buyer's Cartel

Another round of energy-related economic madness sets in.
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G-7 meeting in Germany via the Wall Street Journal

G-7 meeting in Germany via the Wall Street Journal

The WSJ reports G-7 Nears Agreement on Exploring New Sanction Capping Russian Oil Price

The Group of Seven club of wealthy democracies is inching toward an agreement on expanding its sanctions against Russia by looking for a mechanism to cap the purchase price of Russian oil, officials said, but the details are still being worked out.

The details of the oil purchase price cap, which would create a buyers’ cartel of Western nations and their allies, and the gold import, both proposed by the U.S., were currently being finalized ahead of the summit’s conclusion on Tuesday, according to three officials.

Ahead of the G-7 gathering, Treasury Secretary Janet Yellen said that the U.S. was involved in “extremely active” talks with European allies about efforts to form a buyers’ cartel and set a cap on the price of Russian oil. To enforce such a cap, she said last week that officials were reviewing a possible exemption to the European Union’s ban on insuring shipments of Russian oil that would allow insurers to cover shipments of Russian oil only if the sales price falls under a cap.

Price Cap Madness

Never before in history has a international group of buyers stepped forward to create a buyers cartel.

Price caps don't work. It's economic madness to attempt them.

Rather than sell to the EU, Russia will sell to India or China. At best, this round of nonsense does nothing other than routing supply from one place to a more distant place at increased for everyone.

At worst, it will provoke Russia to retaliate by cutting the supply of oil or natural gas across the board. 

Italian Prime Minister Mario Draghi told the meeting that the price cap would be effective against Russia because it would cut financial flows to Moscow while reducing inflation, which has surged across the West partly driven by energy prices, one official familiar with the talks said.

Mr. Draghi has been championing a proposal for the EU to limit the price of Russian gas imports, and sees the proposed oil-price cap as setting a precedent that could pave the way for capping gas payments, too.

If it was so easy, why wasn't this done months ago? Why not set the price at $15 per barrel?

The details are still being worked out. Whatever they are, they won't work. 

Russia can put an end to this madness by cutting off the supply of oil totally. Heck, all Russia has to do is threaten to cut supply and nations dependent on Russian oil, notably Hungary, would veto the proposal.

It takes all 27 nations to agree to do anything in the EU.

What If?

Alternatively, given this madness will drive up the price at the margin by further disrupting supply chains, perhaps Putin is happy with this silly idea.

Theatre of the Absurd

Eurointelligence touched on the absurdity of this idea in a related post last week.

The theatre of the absurd has a long European tradition. But even the famous dramatists in this genre would have struggled to come up with anything quite as absurd as the story of Germany and gas sanctions.

The priority at the beginning of the war was clearly to keep the gas flowing. So the German government and the EU agreed to sanction coal and oil, and then flouted their own sanctions by paying Gazprom in roubles. As a result, Vladimir Putin is now so awash in cash that he can afford to use gas sanctions against the EU.

Europe Told to Prepare for Russia Turning Off Gas

The BBC reports Europe Told to Prepare for Russia Turning Off Gas

The head of the International Energy Agency has warned that Russia may stop supplying gas to Europe this winter. Fatih Birol says he believes a complete shutdown is not the most likely scenario but that Europe needs to work on contingency plans just in case.

It may not be the base case now, but the more things the EU does to provoke Russia, the more likely it becomes the base case.

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European Gas Extends Gains as Specter of Russian Cuts Persists

Bloomberg reports European Gas Extends Gains as Specter of Russian Cuts Persists

European natural gas prices rose for a third day, with the threat of extended Russian supply cuts spurring concerns that the pace of restocking storage sites will be slower than expected.

Gazprom PJSC’s shipments through Nord Stream remain at about 40% of capacity, which the Russian gas exporter has blamed on a technical fault. This has reduced supplies to buyers in Germany, France, Italy and some other nations. The Russian-German subsea link is the biggest gas pipeline to the European Union.

Canada, where a Nord Stream turbine is stranded for repairs, is in talks with Germany on how to provide the component while respecting the sanctions imposed on Russia over its invasion of Ukraine. The turbines were manufactured in Canada and need to be regularly sent back there for maintenance.

The tightened gas supplies prompted some countries to resort to coal for power. Italy, one of the biggest buyers of Russian gas, is temporarily increasing coal-fired generation, joining nations such as Germany, Austria and the Netherlands in reviving mothballed power stations or removing limits on the dirtier-burning fuel.

Emergency Plans in Progress

The New York Times discusses emergency plans as Russia Crimps Gas Flows Just as Europe Races to Stock Up for Winter

On Thursday, Germany triggered the second stage of its three-step emergency gas plan, citing a deterioration of natural gas supplies. The final stage could include gas rationing. “Even if you don’t feel it yet: we are in a gas crisis. Gas is a scarce commodity from now on,” said Robert Habeck, the economy minister.  

Gazprom’s actions have also forced many countries to loosen their restrictions on power plants burning coal, a major source of greenhouse gases.

Gas prices are already extraordinarily high, about six times what they were a year ago. Germany’s finance minister, Christian Lindner, has warned that the persistently high energy costs were threatening to plunge Europe’s largest economy into an economic crisis, and the government has called on consumers and companies to conserve gas.

Coal and Rationing

The EU has been forced into more reliance on coal as Russia cannot repair it pipelines due to sanctions on parts. 

Germany is making plans to ration natural gas. 

But hey, let's call a G-7 meeting and vote for more sanctions, On top of it, let's setup a buyers cartel to tell Russia how much the EU will pay for oil and natural gas.

Putin will do one of two things, perhaps both: 

  1. Laugh out loud
  2. Dramatically reduce the supply of gas it sends to the EU while demanding full price

The G-7 put on a stunning display of economic incompetence. But hey, the lead image was a great photo op.

Biden Skips Meeting With Oil Executives to Meet With Wind Energy Executives

Earlier this year, the president discussed ending sanctions on Venezuela and Iran.

Next month, Biden will travel to Saudi Arabia hoping for a commitment for them to pump more oil.

Last week I noted Biden Skips Meeting With Oil Executives to Meet With Wind Energy Executives

And sanction madness continues. It's driving up prices of energy more than the war itself.

For discussion please see Why Are Energy Prices High? Blame President Biden

This post originated at MishTalk.Com.

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