- The United States seeks to put a limit on Russian crude prices to reduce funds and lower prices per barrel.
- Gal Luft of the Institute for Global Security Analysis called the US strategy “ridiculous” and that the desired effect will be counterproductive.
- “This is not how the oil market works. This is a very sophisticated market, prices cannot be forced to drop”, the expert pointed out.
- Luft likened the plan to going into a store and asking the clerk to accept less money than the listed price.
US President Joe Biden is desperate to lower oil prices as his country faces its highest inflation in 40 years. In recent weeks he has pressured OPEC to increase production and also traveled to Saudi Arabia with the aim of convincing the oil kingdom to open the tap on crude production.
But that is not all. Now Biden wants to put a cap on Russia’s oil prices to reduce the funds flowing into the country’s war chest, while also lowering the cost of oil for consumers.
According to Gal Luft, co-director of the Institute for Global Security Analysis, this is a “ridiculous idea” and could backfire on the US and G7 members. So much so that the expert believes that a barrel of oil could jump to 140 USD.
“It ignores the fact that oil is a fungible product,” he clarified. The term fungible means interchangeable, which implies equal value between two barrels of oil, for example.
“This is not how the oil market works. This is a very sophisticated market, you can’t force prices down. European and American politicians who are talking about $40 a barrel, what they are going to get is $140 a barrel”
Luft.
Furthermore, the expert added:
“What will probably happen is that Russia will restrict its production and create an artificial shortage in the market. You can’t cheat the laws of supply and demand, and you can’t defy the laws of gravity when it comes to a consumable product.”
Luft.
Oil prices have been volatile these last two years, mainly due to the coronavirus pandemic and the war between Russia and Ukraine.
The United States has banned imports of Russian oil, while the European Union plans to impose a gradual embargo.
On the other hand, oil market analysts have warned that both India and China are buying Russian crude “at a discount”, which could also affect the measure that the United States tries to impose.
Last week, Indonesian Finance Minister Sri Mulyani Indrawati told CNBC that energy problems are on the supply side and a price cap won’t solve that.
