As an additional burden on Russia and against domestic inflation, the G7 countries are considering a price cap on Russian oil and natural gas. Other states would then have to adhere to it. Achieving this is easier than you think.
Oil is currently 26 percent more expensive on the world market than it was before the Ukraine war broke out. Gas prices have even risen by 50 percent in just four months. This not only burdens German citizens with higher costs for electricity, heating, petrol and a generally enormous increase in inflation, it is also a gold mine for Russia. In the course of the price increases, the costs for Russian raw materials have also risen significantly. The only exception here is the Russian type of oil ESPO, which is mined in East Siberia and whose main buyer is China. It has even fallen slightly in price.
But gas prices in particular are putting a heavy strain on western states. In Elmau, Bavaria, the heads of government of the G7 countries Germany, USA, Canada, France, Italy, Great Britain and Japan are currently discussing how prices could be pushed down again. This is intended to achieve two effects: firstly, energy prices in countries such as Germany and Italy that are still heavily dependent on Russia should fall again, secondly, Russia should earn less money for its war chest – in the best case to the point where the country starts the war in Ukraine cannot continue.
The idea, which the responsible ministers of the seven countries are now to evaluate, is to introduce a price cap. Russian oil and gas should then only be traded at a maximum price on the world market – if at all. Some countries, such as the USA, have already imposed a trade embargo on Russian oil and gas, and the EU no longer wants to buy Russian oil from next year.
The proposal has an obvious catch. Although the seven countries can decide for themselves to only offer Russia a maximum price for its raw materials, other countries such as China or India could continue to negotiate their prices freely. And if such countries then offer more per barrel and cubic meter, Russia would simply sell its oil and gas there instead of to the European G7 countries.
But the G7 countries have an ace up their sleeve. 95 percent of the world’s oil tankers are owned by members of the International Group of Protection
But even with that, it is not certain that a price cap could be enforced. At first, the decision could be difficult. Technically, new sanctions with corresponding specifications would have to be issued. But the EU would first have to agree on the details. Even with the last sanctions package, it was a tough process between the 27 EU countries. It is quite possible that this time, too, Eastern European countries that were particularly affected would fight for significantly higher oil and gas prices so as not to anger Russia too much.
Even with a new package of EU sanctions, the success of a price cap is not guaranteed. First, Russia could simply refuse to sell its commodities for less than the maximum price. Depending on how high that cap is set, Russia could decide that it would be better off storing oil and gas domestically than selling it cheaply to the West.
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Finally, a price cap would only apply to oil and gas exported from Russia via tankers. Raw materials that are transported abroad via pipelines cannot be capped. Here the EU and the other G7 countries could only refuse to pay more than a certain price for oil and gas. China, in turn, can do whatever it wants with the pipelines that lead into the country from eastern Siberia.
It is precisely for these reasons that a price cap has not yet been decided at the G7 summit, but is to be evaluated as an option. The finance and economics ministries of the G7 countries must now find ideas and methods to implement such a measure successfully and watertight by winter at the latest.
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