EU blocks talks on price level of Russian oil cap project
Bloomberg Reports EU Talks Stall on Price Level for Proposed Russian Oil Cap
The EU’s executive arm proposed a level of $65 a barrel, which Poland and the Baltics rejected as being too generous to Moscow, the people said. But several countries with major maritime industries, including Greece, are unwilling to dip below $70, the top of the range the EU proposed earlier on Wednesday.
$70 is roughly where Russian oil known as Urals is currently trading.
Reuters reports EU split over Russian oil price cap level, talks to resume on Thursday
- Representatives of the 27 EU governments met in Brussels to discuss a G7 proposal to set the price cap 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 the $65-70 a barrel would leave Russia with too much profit, since production costs are around $20 a barrel.
- Cyprus, Greece and Malta – countries with major shipping industries that stand to lose the most if Russian oil shipments are blocked – believe the cap is too low and are demanding compensation for lost business or more time to s ‘adapt.
The kicker is fun: “EU diplomats said most EU countries, led by G7 members France and Germany, were in favor of price caps, worrying only about the ability to enforce it..”
This brings us back to how any economist might think such a ceiling might work.
The incentive to cheat
For a more in-depth discussion of the obvious that many economists refuse to see, please see Carnegie’s article The Flaw in the Plan to Cap Russian Oil Prices
Whenever countries on the sanctions lists encounter difficulties in selling their natural resources, creative minds will find a way to thwart the proposed measures with the help of companies willing to turn a blind eye to shady elements of ostensibly legal. Oil shipments could be bundled with certain symbolic but costly services, such as customs services, laboratory analyzes or translation of documents. Another scheme would be to load a supposedly full 80,000 ton tanker with only 50,000 barrels of oil, thus bringing the price of freight per barrel closer to the market price.
Such schemes would, of course, require some collusion on the part of intermediary countries, but this 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 is also cooperating with Iran and Venezuela in violation of sanctions regimes.
Paradoxically, Russia could get help from the OPEC countries here. For them, a cartel of emerging buyers risks manipulating the entire oil market and its prices. If the cartel succeeds in forcing Russia to obey its rules, Arab countries could be next. If Russia thwarts the price cap by cutting production, Saudi Arabia may therefore be reluctant to increase its oil exports to compensate for the cut, whether or not it has sufficient spare production capacity.
Finally, the jury is still out on whether India and China, the biggest new buyers of Russian oil, are ready to join the price cap coalition.
Western allies aim to agree Russian oil price cap on Wednesday
The Wall Street Journal reports that Western allies are aiming to agree on a Russian oil price cap on Wednesday.
The aim of the plan, which has been pushed hard by Treasury Secretary Janet Yellen, is to reduce Russian energy export revenues while avoiding a spike in oil prices. when a European embargo on imports of Russian oil comes into force early next month. Despite European reluctance at the time, the G-7 first agreed to set the oil price cap in June after Russia invaded Ukraine on February 24.
Objective of the plan
The purpose of the plan is not to eat Russian cake while eating Russian cake.
It’s pretty amazing that anyone thinks the plan can possibly work, but President Biden, the EU, Janet Yellen and even leading economists think the cap is a good idea.
Q&A Why not?
Q: Why not cap the price of everything and end inflation?
A: Understand it.
Scroll to continue
Q: Is it possible for a cap to appear to work?
A: Yes. If the ceiling is set high enough, it will make no sense.
And if, by some lucky fate, a ceiling is set where the direction of oil is headed anyway, then the economic illiterates will boo and cheer their supposed success.
Why don’t capital letters work?
- China, India and other countries will not accept. That’s enough there to show the ridiculousness of the idea.
- EU countries are encouraged to cheat.
One of two things
- The plug will fail and do nothing.
- The cap fails dramatically and drives up the price by rerouting oil headed to the EU to China and India instead. Then the EU will have to get oil from the US or OPEC on longer routes, which will increase the cost.
The two points above are isolated. But things should not be seen in isolation. Given a looming global recession, oil prices are expected to fall anyway.
If they do, then, as noted above, the economic illiterates will holler and applaud the supposed success of the caps.
This third point concerns June 27.
The US and EU have been wrestling ever since in an attempt to reach a price cap agreement. The bloc still needs approval from all 27 nations on a specific cap.
Many of the points above were also in my November 22 article Under pressure from the US, the EU agrees to cap the price of Russian oil.
The struggle to get a deal stems from the impossibility of the goal of not eating Russian cake while eating Russian cake.
This alone tells you that the plan is doomed.
Reiterating my November 22 comment, this cap idea is so dumb that only economists and politicians are dumb enough to believe it can work.
This post is from MishTalk.Com.
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