In the battle against Russia’s huge revenues from energy sales and soaring inflation in the West due to rising energy prices, Western countries are now formulating a new strategy: adopting a price cap for Russian oil and gas. It is a kind of huge consumer association, called “Monpson” in the economy, that will counterbalance Russia’s monopoly power in exporting its energy resources, and the OPEC cartel’s refusal to increase oil production and lower prices under an agreement with the country.
The idea of setting a roof price emerged at the beginning of the conflict in Ukraine, as an alternative to a comprehensive embargo on oil and gas, which is apparently not economically possible for the EU, but has resurfaced in recent days. According to reports, the 7G countries will even discuss it at the annual summit of heads of state that will begin this coming Sunday in Germany at the Almau castle in Bavaria.
Russia halved exports to Europe
In the current state of affairs, for example, Russia has reduced its natural gas exports to Europe by half in recent days to prevent it from filling its reservoirs for the winter, but enjoys higher capacities for the reduced quantity because gas prices have soared at least fivefold. German Economy Minister Robert Habakkuk has acknowledged that “Russia has the upper hand” due to German and European dependence on it.
The proposal that will be discussed, according to recent reports, will include the formation of a uniform front of countries within and outside the EU – which will refuse to purchase Russian gas and Russian oil at the market price, and set a fixed roof price. The US and UK have already pledged not to buy Russian oil, but they could use their influence to persuade other countries in the world to commit to the price cap to be set. Lowering the price to Russia could also lower the price for other oil suppliers, thus helping the US.
Asked about the initiative, US Treasury Secretary Janet Yellen said during a visit to Toronto this week that it was indeed a possibility being discussed these days along with Canada and other countries. “We are talking about setting a roof price … that will increase and strengthen the restrictions imposed on Russian energy,” she said.
According to her, the adoption of the mechanism “will lower the price of Russian oil and hurt Putin’s revenues, but will allow more supplies to the global market.” Until the beginning of the war in Ukraine, Russia was the third largest oil supplier in the world.
Germany supports but warns of complications
The idea has gained popularity in the EU in recent weeks, and is particularly supported by Italy. The Italian economy minister said this week that “this is the only sustainable solution” and said the European Commission was already working on its inclusion as part of the sixth round of sanctions on Russia. In Germany, they warned of the complications that the proposal would provoke in terms of the cohesion of the union, but expressed support in principle for it.
“The idea is that we will reach an agreement under which we can say ‘this is our price, and we will not pay more,'” said Economy Minister Robert Habek. The union has already decided on a partial embargo on Russian oil, from which countries like Hungary and Slovakia that receive oil through pipelines rather than by sea will be excluded. The implementation of the embargo will be gradual and will last for many months.
So far, Russia has found new markets for its oil, especially in China and India that buy unprecedented amounts of Russian oil, at discounts of 20% -30% or more compared to oil from other sources. The question is whether Russia will need the receipts it receives from oil sales to Europe. On the gas issue, where there is still no infrastructure for exporting natural gas to the East, Russia is more dependent on Europe.