From The Milken Institute Review, July 27:
The notion that oil-consuming nations should organize a buyers’ cartel to cap the price of oil — promoted by U.S. Treasury Secretary Janet Yellen and recently endorsed by the leaders of the Group of Seven — sounds fanciful. After all, if this were workable, why didn’t we do it years ago to bring down oil prices?
In fact, this is a creative and perhaps even practical response to two unusual imperatives. The first is well covered by the press: to reduce the flow of oil revenues that are financing Russia’s war machine. The second is not: to prevent an economically catastrophic increase in oil prices because of one element of European sanctions set to take effect at the end of this year.
Oil prices fell to $20 a barrel at the beginning of the pandemic in 2020, returned to pre- pandemic levels of around $60 a barrel in early 2021 as the economy recovered, and then ballooned above $100 a barrel after Russia invaded Ukraine. The European Union, the U.S., Canada and the U.K. have agreed to stop buying (most) Russian oil, but Russia is still selling huge volumes — albeit at a discount from the world price — to India, China and other energy-thirsty economies. Russia normally accounts for about 10 percent of global oil production, but its exports have been reduced since its invasion of Ukraine. Today, U.S. officials estimate that ocean-going tankers carry about 70 percent of Russia’s 5.6 million barrels a day of crude oil exports. (The rest goes through pipelines, roughly half to Europe and half to China.)
One textbook solution to keeping oil flowing from Russia but reducing its revenues would be for major importers to impose a tariff on Russian oil. Because oil is a global market, consumers would pay the going world price, but Russia would receive the world price minus the tariff — the tariff revenue could, for instance, be used to aid Ukraine.Secretary Yellen floated that idea, but it didn’t go anywhere. An international agreement to cap the price of Russian oil is an alternative. Russia could, of course, simply refuse to sell oil, but, in theory, if the cap is set above Russia’s marginal cost of production, it would have an incentive to keep pumping.
There’s more, though, to the story than oil buyers’ talk of a ceiling on the price they’re willing to pay for Russian oil. At the beginning of June, the European Union agreed to bar its companies from “insuring and financing the transport, in particular through maritime routes, of [Russian] oil to third parties” after the end of 2022 to make it “difficult for Russia to continue exporting its crude oil and petroleum products to the rest of the world.” The U.K. agreed to go along.
This is a big deal because European and British companies account for about 85-90 percent of the business of insuring, reinsuring and financing seaborne Russian oil. Owners of oil tankers of any nationality will refuse to carry Russian oil if they can’t get high-grade insurance. The operators of the Suez Canal, for instance, don’t permit uninsured ships to sail through the vital channel....
....MUCH MORE
Some previous visits to The Milken Institute Review:- "Supercapacitors: The Next Revolution in Electronics"
- "There is No Such Thing as Objective Climate Policy"
- "A review of Oceans of Grain: How American Wheat Remade the World" (from Ukraine to Kansas)
- Energy Transition: What Will Replace The Revenues Governments Currently Receive From Traditional Energy?
- "Economic impact of excess weight now exceeds $1.7 trillion, new Milken Institute report reveals"
