G7 exploring an oil price cap—but analysts warn the move could prompt Russia to cut Europe off completely
The Group of Seven economic powers announced on Tuesday that they are exploring a cap on the price of oil that comes from Russia.
While this move might curb the revenues Moscow is raking in to fund the war in Ukraine, analysts warn it could also push President Vladimir Putin to cut off gas to the West completely.
“The G7 have to prepare for a shutdown of gas. The G7 can deal with a cutback on oil. There are other supplies that could be gotten around the world, but the gas could be shut off and that would have consequences,” Jeffrey Schott, a senior fellow at the Peterson Institute for International Economics, told CNBC.
The oil price cap the seven countries are considering would set a price ceiling at which financial services, insurance, and shipping companies can purchase Russian oil and gas.
Europe is facing “a very tight situation,” Schott said, echoing the sentiments of the International Energy Agency (IEA), which also said Europe should prepare for the scenario that Russia cuts off the gas in the coming winter months.
“The more there is hostility against Russia, the more Putin threatens and perhaps acts to cut off more gas to Europe. I see that coming sooner rather than later,” Schott notes.
“The big unknown is Vladimir Putin’s reaction,” Tamas Varga, an analyst at oil broker PVM, told Reuters, noting that a buyers’ cartel might also make inflationary pressures worse.
Varga added that if Putin decides to reduce oil or gas exports, prices will rise significantly, which will be “a nightmare scenario—both for Europe and Russia.”
Putin’s response to the oil price cap
An oil price cap would choke off some of the revenues Russia is using to fund the war in Ukraine.
The move would also depress the price of Russia’s oil benchmark Ural, which has risen only on the back of Western bans, phaseouts, and sanctions.
Russian oil export revenues climbed in May while volumes fell, according to the IEA in its June monthly report.
But if Russia retaliates to the oil price cap by cutting off supply, gas rationing and alternative fuels could become a reality across Europe.
Russia’s state-backed energy supplier Gazprom already cut the amount of gas flowing through Nord Stream 1—the Russia-to-Germany gas pipeline—by 60%, which prompted Germany, Italy, Austria, and the Netherlands to switch their coal plants on again.
Germany, which was once the biggest buyer of Russian gas, has already triggered an alarm stage—the second of its three-stage emergency gas plan—with German Economy Minister Robert Habeck advising Germans to slow their gas consumption.
While Western countries are keen to cut out Russian oil, China and India are among 35 countries that have refused to condemn Russia for its war in Ukraine and are increasingly becoming the biggest importers of the heavily discounted oil after Europe cut its imports.
This story was originally featured on Fortune.com
