THE PRICE CAP

7 September 2022

Officials from the U.S. Treasury and the British cabinet look at oil and gas futures and see them lower and stable, and conclude that markets are already anticipating that the price cap will work.

The idea of the cap is to keep Russian oil gas and refined products flowing but at a lower price so as to reduce the Kremlin's profits.

Countries will have an incentive to co-operate not just because the cap will lower prices, but because the sanctions will cover shipping, insuring and financing.

The multinational companies will want to co-operate because otherwise they will suffer American sanctions. And it will be better for all companies, big and small, to co-operate rather than trying to find workarounds, than to risk an outright ban on all purchasesfrom Russia. If any companies do find ways around, they will suffer financially from higher prices for insurance etc so they'll have an incentive to co-operate.

Neither is it expected that Russia will make any profit greater than break-even (which is twice the break-even point of Saudi) by increasing output as its creaking supply infrastructure will reach its limits pretty quickly. 

And Moscow cannot cut off the oil to those who participate in the cap because it would deprive itself of the income that it needs to pay the rising costs of this war.

Well, if you believe any of that...! We know without even having to examine the arguments or the data that this will be yet another American disaster of - for it, and for us - global proportions.

The takeaways from this particular American adventure and debacle are that it is best to keep governments small and avoid undue interference in market mechanisms and any grand schemes for sudden change. It demonstrates why globalisation and making economies dependant the ones on the others as reducing the risk of war, is a wise course: we are seeing what happens if America does not follow its own post WW2 policy aim and instead provokes war with Russia.

So when we look at oil and gas futures and see them lower, we can conclude not that markets are anticipating the success of the price cap in reducing the costs of oil and gas to the economy, but that demand is falling off a cliff because a major recession for the global North is on the way.