The problem of oil and gas price caps | OilPrice.com

This week, two documents were published by two ministries: the European Commission in Brussels and the Treasury Department in Washington. The Commission document was a proposal for “a new instrument” to limit excessive gas prices in Europe. That of the Treasury document were guidance on the implementation of a price cap policy for crude oil from the Russian Federation. Both were slammed by critics within hours of posting.

The two documents represent the long-awaited price caps that have been discussed since June for the oil price cap on Russian crude and since September for the gas price cap. None of the end results seem satisfactory.

The US Treasury’s Oil Price Cap Guidelines, for example, provides 12 pages of information on how the cap would be applied, but stops short of naming the level of the cap. The reason is that it is still under discussion and there is no consensus on what it should be.

The cap must be agreed by both the G7 and the EU. As the EU acts as the eighth partner in the group in addition to having three members within the G7 itself, the US is now waiting for the EU to agree on a cap level. It turns out to be a challenge.

Reuters reported on Thursday that European Union leaders failed to agree on a cap level because the G7’s proposal to consider a range of between $65 and $70 a barrel was seen as too low for some EU members and too high for others.

For others, like US oil industry veteran and commentator David Blackmon, the cap was a joke – Russia already sells its oil to China and India at prices within the proposed range, so the cap won’t actually cap anything at all. .

Energy Intelligence’s OPEC correspondent, Amena Bakr, was also candid. In a tweet thread on Wednesday, she said that “If you can’t deliver something, don’t make false promises!” The EU looking to cap oil at 65-70 is a joke. How will this price range hurt Russia’s war funding? after which she called the proposed range of caps toothless.

Yet Bakr also said that if this is the level at which the price “ceiling” is agreed, it would be proof that the EU has recognized the importance of energy security over geopolitics. Reaching an agreement remains uncertain as the differences seem quite significant.

Poland, for example, would not accept a cap higher than $30 a barrel, while Cyprus wants compensation for shipping activities it would lose because of the cap. Even before it is finalized, the Russian oil price cap is already being ridiculed.

Meanwhile, the European Commission proposed a gas price cap for all imports into the European Union which immediately became the butt of jokes. At 275 euros per MWh, the ceiling price is far too high according to some. And it won’t be triggered even in a price spike like the EU experienced this summer, the FT reports.

The EC proposal says gas prices on the EU market must stay at the €275 level for two weeks before the capping mechanism is triggered, but the FT reminds that even this summer, when prices temporarily climbed to 300 euros per MWh, they never stayed at 275 euros per MWh for two whole weeks.

Enough to make the cap useless but in addition to being useless, some have warned that it could harm the European gas market. Traders and Exchanges slammed the Commission for risking disruption of energy markets on the continent and pushing transactions from transparent exchanges to the opaque over-the-counter market.

Speaking of gas price caps, the European Federation of Energy Traders said this week that “even a short intervention would have serious, unintended and irreversible consequences by undermining market confidence that the value of gas is known and transparent”.

ICE, the exchange operator, went further and claimed the Cost of such an intervention would be 33 billion dollars. This is the size of additional margin payments for traders operating in the TTF market, as these payments increase by 80% due to the cap. This, ICE said in a memo to the EC seen by the FT, could destabilize the market.

Thus, on the one hand, the G7 proposes a cap on Russian oil prices which aims to reduce Russia’s oil revenues while maintaining the flow of oil to international markets – a paradoxical objective – and, on the other hand , the EC proposes a price cap natural gas price mechanism which is unlikely to ever be used given the price level set for the cap.

It’s certainly worth ridiculing, but at the same time a more serious look is warranted as both movements tell the same story. Trying to cap the price at which Russia sells its oil is risky and a risk not worth taking right now with inflation already where it is. Trying to cap natural gas imports to the EU is also risky and it’s another risk not worth taking, especially as winter begins in Europe.

By Tsvetana Paraskova for Oilprice.com

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