The Problem of Oil and Gas Price Caps

This week saw two documents published by two government departments: the European Commission in Brussels and the Treasury Department in Washington. of the Commission document It was a proposal for a “new tool” aimed at curbing excessive gas prices in Europe. Treasury document He was in charge of the implementation of the price limit policy against crude oil produced in the Russian Federation. Both were panned by critics within hours of their publication.

The two documents reflect the long-awaited price caps negotiated for the oil price ceiling for Russian crude from June and the gas price ceiling from September. None of the final results seem satisfactory.

For example, the US Treasury’s oil price cap guidance provides 12 pages of information on how to apply the cap, but stops short of actually naming the cap level. The reason is that it is still being debated and there is no consensus on what it should be.

The border must be agreed by both the G7 and the EU. With the EU acting as the eighth partner in the G7, in addition to having three members in the G7 itself, the US is now waiting for the EU to agree on the ceiling level. This proves to be a problem.

Reuters reported on Thursday that European Union leaders could not agree on an upper limit, as a G7 proposal to consider a range between $65 and $70 a barrel was considered too low for some EU members and too high for others.

For others, like US oil industry vet and commentator David Blackmon, the cap was a joke — Russia already sells its oil to China and India at bid prices, so the cap wouldn’t actually limit anything. .

Energy Intelligence’s OPEC correspondent Amena Bakr also spoke openly. In a tweet on Wednesday, he he said that “If you can’t do something, don’t make false promises!” It is a joke that the EU wants to increase the oil limit to 65-70. How will this price range affect Russia’s war financing?” after which he referred to the proposed cap spacing as toothless.

However, Bakr also said that if this price “cap” is the agreed level, it would be evidence that the EU recognizes that energy security is more important than geopolitics. It remains unclear whether there will be an agreement, as the differences appear to be quite significant.

For example, Poland will not accept a limit above $30 per barrel, while Cyprus wants compensation for the shipping business it will lose due to the limit. Even before it ends, the Russian oil price cap is already being mocked.

Meanwhile, the European Commission proposed to impose a gas price cap on all imports in the European Union, which immediately became the target of jokes. 275 euros per MWh is considered by some to be too high a price. And it won’t even be triggered by a price increase like what the EU saw this summer, FT reports.

The EC proposal states that gas prices on the EU market should remain at €275 for two weeks before the capping mechanism kicks in, but the FT points out that even this summer, when prices temporarily rise to €300 per MWh, they will never for two weeks It did not remain at 275 euros per MWh.

It is enough to render the cap useless, but as well as being useless, some have warned that it could be harmful to the European gas market. Traders and exchanges he snapped Commission due to the risk of disrupting energy markets on the continent and pushing deals from transparent exchanges to the opaque over-the-counter market.

Speaking about the gas price cap, the European Energy Traders Federation said this week that “even a short intervention would have severe, unpredictable and irreversible consequences, damaging market confidence that the cost of gas is known and transparent”.

Exchange operator ICE went even further, claiming value such an intervention would cost $33 billion. This is the size of the additional margin fees for traders operating in the TTF market, as these fees increase by 80 percent, taking into account the cap. This could destabilize the market, ICE said in a memo to the EC seen by the FT.

So, on the one hand, the G7 proposes a price cap on Russian oil, which aims to keep oil flowing to international markets while reducing Russia’s oil revenues – a paradoxical goal – and on the other hand, the EC proposes a price cap. the natural gas pricing mechanism will never be used given the price level set for the cap.

It’s certainly worth making fun of, but at the same time, a more serious look is warranted because both acts tell the same story. Trying to limit the price at which Russia sells its oil is risky and not worth taking now when it’s inflation. Trying to limit natural gas imports to the EU is also risky, and this is another risk not worth taking, especially as winter begins in Europe.

By Tsvetana Paraskova for

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