To avoid a large increase in oil prices to European customers that would result from reduced supply, finance ministers from the G‑7 nations recently agreed in principle with U.S. Treasury Secretary Janet Yellen’s plan to reduce Russian revenues from the sale of its oil. The plan would limit the price paid to Russia rather than ban the sale of Russian oil to the European Union, as is currently scheduled to take effect in early December. Price caps are aimed at keeping supply roughly constant while reducing Russian revenue.
How would these price controls function? How will markets likely respond? And will throwing another log on the economic warfare fire work?
The new plan relies on the current western quasi‐monopoly on oil tanker insurance. Western insurers would be banned from offering tanker insurance for Russian crude shipments unless the price paid for the oil was below the price‐controlled amount. For now, non‐western insurance substitutes, while they exist, could not realistically fill the void. This would serve to decrease Russian revenue from oil sales.
Let’s assume that this policy is implemented and insurance companies can verify the price paid to Russia even though insurance companies say otherwise. How would energy markets react?
For insight we can examine the U.S. experience with oil price controls during the 1970s. Price‐controlled crude oil was not the marginal source of crude for U.S. refiners and refined products were also imported and not price‐controlled. Thus, gasoline prices were not affected by crude oil price controls. The major effect was that refiners that had access to price‐controlled oil made more profit than refiners that used market‐price oil because the price of gasoline produced by both was the same.
We could also look to the sale of Russian oil to Indian and Chinese refiners so far this year. According to the New York Times, with Western insurers already wary of underwriting Russian commerce, “oil companies in countries like India have demanded very steep discounts on the price to cover the extra cost and risks.”
What was the result? The Times notes “trade between Russia and China, much of it Russian energy exports, jumped nearly 30 percent in the first three months of this year compared with a year earlier.” The Yellen plan aims at replicating this price‐discounting scheme for crude to refiners in Europe.
Oil is an appealing target for Western countries because Russia earns more than three times as much revenue from oil and refined products as it does from natural gas. Attempting to choke Russia by limiting its oil revenue can be seen as the mirror‐reflection of Russia’s effort to coerce Europe by limiting the flow of natural gas.
Beyond the mechanics of how an effort to limit Russian revenue from oil would work lies the question of whether the effort will achieve its desired end. Could a reduction in oil revenue alter Russia’s foreign policy behavior in Ukraine?
Western officials have been reluctant to explicitly spell out the logic of sanctions. In general, they suggest the sanctions are a precise weapon primarily targeting Putin cronies, not the Russian population. This tactic is seen as increasing pressure on Putin to make concessions or reverse the invasion altogether.
Rhetoric aside, the economic weapons Western states have used to date have produced effects more akin to carpet bombing. Financial sanctions and sanctions against the Central Bank of Russia, for example, sent the ruble into chaos and led the Kremlin to institute currency controls. But a New York Times reporter in Moscow this month perceived little mass suffering: according to the Times, Putin “has mostly succeeded in making Russian life feel as normal as possible.”
Duke University sanctions expert Bruce Jentleson remarked last month that when it comes to sanctions, the war is entering “the attrition phase.”
“Who will get ground down first?,” Jentleson asked.
Both Russia and its (mainly European) economic warfare opponents are engaged in tit‐for‐tat escalation, with each side wagering that it can suffer more than the other. Whether entering a competitive suffering contest against Russia is a good bet seems to stand on dubious historical footing, but in this context, a cap on the price of Russian oil is an escalation, not a sea change.
Even before the new effort to reduce Russian oil revenue, the Kremlin shut off the Nord Stream 1 gas pipeline, blaming Western sanctions for preventing it from acquiring a turbine needed to safely restart gas flows. German Chancellor Olaf Scholz is already having to tour the country, fending off questions about what many Germans fear as they head into winter: the choice between heating and eating.
Western sanctions are hurting the Russian people and the Russian government, and the Kremlin would prefer the economic pressure stop. But historically, when major powers have perceived vital interests, they have been willing to suffer extraordinary political, military, and economic pain in pursuit of those interests. So while oil price caps could deprive Russia of some portion of the profits from its crude, there is little reason to believe that such a strategy — even if it worked perfectly — will help change the outcome in Ukraine.
Justin Logan is the director of defense and foreign policy studies at the Cato Institute. Peter Van Doren is editor of the quarterly journal Regulationand an expert on the regulation of housing, land, energy, the environment, transportation, and labor.