EU talks stall over price level of proposed Russian oil cap
Bloomberg Reports EU Talks Stalled Over Price Level Of Proposed Russian Oil Cap
The EU’s executive arm proposed a level of $65 a barrel, which Poland and the Baltic nations rejected for being too generous to Moscow, the people said. But several countries with major shipping industries, including Greece, do not want to go below $70, the high end of the range proposed by the EU on Wednesday.
$70 is roughly where the Russian oil known as the Urals is trading right now.
Reuters reports EU splits on Russian oil price peak, talks to resume on Thursday
- Representatives of the 27 EU governments met in Brussels to discuss a G7 proposal to set the maximum price in the range of $65-$70 a barrel, but the level proved too low for some and too high for others.
- Poland, Lithuania and Estonia believe that $65-$70 a barrel would leave Russia with too high a profit, as production costs are around $20 a barrel.
- Cyprus, Greece and Malta – countries with large shipping industries that stand to lose the most if Russian oil shipments are obstructed – think the cap is too low and are demanding compensation for lost business or more time to adjust.
enforce the limit
The kicker is fun: “EU diplomats said most EU countries, led by G7 members France and Germany, supported the price cap, concerned only with the ability to enforce it..”
This brings us back to how any economist might think that such a limit could work.
The incentive to cheat
For a more detailed discussion of the obvious that many economists refuse to see, consider Carnegie’s article The Flaw in the Plan to Cap Russian Oil Price.
Whenever countries on the sanctions lists struggle to sell their natural resources, creative minds will find a way to thwart proposed measures with the help of companies prepared to turn a blind eye to the shadowy elements of seemingly legal transactions. Oil shipments could be combined with some symbolic but expensive services, such as customs services, laboratory analysis or document translation. Another scheme would involve loading a supposedly full 80,000-ton tanker with just 50,000 barrels of oil, bringing the loading price per barrel closer to the market price.
Such schemes would, of course, require some collusion on the part of the intermediary countries, but that is unlikely to be a problem. In recent months, Malaysia’s oil exports to China have exceeded the country’s actual oil production by a third. Malaysia also cooperates with Iran and Venezuela in contravention of sanctions regimes.
Paradoxically, Russia can receive help from OPEC countries here. For them, a cartel of emerging buyers risks manipulating the entire oil market and its prices. If the cartel manages to force Russia to obey its rules, the Arab countries may be next. If Russia offsets the price cap by reducing its production, therefore, Saudi Arabia may be reluctant to increase its oil exports to make up for the reduction, whether or not it has sufficient production capacity available.
Finally, the jury is still out on whether India and China, the biggest new buyers of Russian oil, are prepared to join the price-cap coalition.
Western allies aim to agree Russian oil price cap on Wednesday
The Wall Street Journal reports that the Western allies are seeking to agree on a price cap for Russian oil.
The goal of the plan, which was pushed hard by Treasury Secretary Janet Yellen, is to reduce Russian energy export revenues and prevent a rise in oil prices. when a European embargo on Russian oil imports takes effect early next month. Despite European reluctance at the time, the G-7 agreed for the first time to set the oil price ceiling in June, following Russia’s invasion of Ukraine on February 24.
Objective of the Plan
The goal of the plan is not to eat Russian cake while eating Russian cake.
It’s pretty surprising that anyone thinks the plan can work, but President Biden, the EU, Janet Yellen, and even prominent economists think the cap is a good idea.
Questions and answers Why not?
Q: Why not limit the price of everything and end inflation?
A: Find out.
Scroll down to Continue
Q: Is it possible for a cap to appear to work?
A: Yes. If the limit is set high enough, it won’t make sense.
And if by some lucky fate a cap is set where oil is going anyway, then the economic illiterates will be howling and cheering at its supposed success.
Why don’t capital letters work?
- China, India and other countries will not agree. That’s enough to show the ridiculousness of the idea.
- EU countries have an incentive to cheat.
one of two things
- The cap will fail and do nothing.
- The cap fails spectacularly and raises the price by diverting oil heading to the EU to China and India. Then the EU will have to get oil from the US or OPEC through longer routes, which will increase the cost.
The two previous points are isolated. But things should not be seen in isolation. Given a pending global recession, oil prices are likely to decline anyway.
If they do, then, as noted above, the economic illiterates will be shouting and cheering for the supposed success of tapas.
That third point is from June 27.
The US and the EU have been fighting ever since to try to reach an agreement on price caps. The bloc still needs the approval of all 27 nations on a precise ceiling.
Many of the above points were also in my November 22 post Under pressure from the US, the EU agrees to limit the price of Russian oil.
The struggle to reach an agreement arises from the impossibility of the goal of not eating Russian cake while eating Russian cake.
That just tells you that the plan is doomed.
Reiterating my comment from November 22nd, this cap idea is so stupid that only economists and politicians are foolish enough to believe it can work.
This post originated from MishTalk.Com.
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