uThe price of Brent oil has risen 17 percent since the start of the Russian attack on Ukraine, and gas prices are almost 45 percent higher than at the end of February. High energy prices are increasingly becoming a burden on the global economy. Inflation rates are rising, growth forecasts are falling. And as citizens and businesses grow frustrated, the pressure on governments to do something grows.
At the G-7 summit at Schloss Elmau on Sunday, the heads of state and government of the seven leading industrial nations discussed, among other things, an oil price cap. The Americans in particular are promoting the idea of capping Russian oil prices in order to limit Russia’s income from financing the war. They get support from Canada. Federal Economics Minister Robert Habeck (Greens) signaled openness to such an instrument as early as May. “We no longer pay any price,” he said at the time.
There are indications that one of the items in Tuesday’s G7 final communiqué could be a joint declaration of intent for the development of an oil price cap. It is not easy to integrate such an instrument into the different sanctions regimes, according to government circles. “But we are well on the way to finding an agreement.” In May, Russia had calculated that it expects the equivalent of 13.7 billion euros in additional income for its oil and gas exports this year.
Veronika Grimm, a member of the Federal Government’s Advisory Council, does not think much of the upper price limit under discussion. A price cap for oil only works if all the major buyer countries participate. “That would also be China, India and Indonesia. It is highly unlikely, not to say impossible, that this coalition will come into existence,” Grimm told the FAZ. Some countries are already taking advantage of the discount on Russian oil to sell it at high prices to the West. “A tariff would be a much better option.” Grimm was also critical of the American proposal to impose an embargo on Russian gold. “It is doubtful whether the goal of making it more difficult to finance the war will come closer.”
30 percent of global demand
In terms of oil, the G-7 countries Germany, France, Great Britain, Italy, Japan, Canada and the United States together account for around 30 percent of international demand. In its sixth package of sanctions at the end of May, the EU agreed to stop importing Russian oil – but not until 2023 and only for oil that enters the EU by sea, which allows exceptions for Hungary, for example. Part of the embargo is that ships transporting Russian oil should no longer be insured. The Americans are now proposing exceptions to this insurance ban if the oil being transported is significantly cheaper. The great unknown is to what pain threshold Russia would still deliver. If the price cap is too low, the country could tighten exports and prices would rise even more.
The Düsseldorf economist Jens Südekum points to another problem: “The price cap should now drive Putin into the parade. But if the maximum price is actually enforced, European demand for Russian oil will suddenly increase again. That would obviously run counter to the embargo that was just decided.” The G 7 actually want to use less and no more fossil energy to protect the global climate.
To make matters worse, there are also different preferences within the EU. Italian Prime Minister Mario Draghi is pushing for a price cap for Russian gas, which is more important in Europe than Russian oil. In many places, gas is not only used for heating, but also to generate electricity. The hopes at the beginning of the war that the price increase would only be short-lived have long since been dashed. The head of the energy supplier RWE assumes three to five years with high electricity and gas prices.
