European leaders are wrangling about the level of two energy price caps: one on European wholesale natural gas prices and another on Russian oil exports. Despite the focus on the price level disagreement, the real fight is about policy: What the price caps are intended to do, and whether there are any acceptable tradeoffs for them.
So far, the only thing the European leaders have agreed upon is that they want something they can all call a “cap” to look tough on Russia. It doesn’t matter if the final product looks more like a unicorn — highly desirable, but very, very rare — or, increasingly, a bit of a chimera. Both caps are meant to resolve “all of the above” problems while triggering “none of the below” tradeoffs. If they can get through all the push-me-pull-yous, it will be nothing short of a miracle.
The first of the energy caps is domestic: the wholesale price for natural gas in the European Union. The group is focusing on the Title Transfer Facility (TTF), a Dutch gas price that serves as a benchmark for the continent. The European Commission has proposed a price cap at €275 ($286.40) per megawatt hour, compared to current prices of about €125 per MWh. TTF averaged about €20 per MWh between 2010 and 2020.
The proposal has, however, two additional conditions: the cap will only be triggered if the front-month TTF contract settles for 10 consecutive trading days above €275 per MWh, and if it’s trading at a significant premium to global LNG prices. Those conditions are extreme: They weren’t met during the EU gas crisis in August, when TTF prices briefly settled at a record of nearly €339 per MWh. Critics describe the proposal as “not sufficient” (France), a “mockery” (Spain) or a “joke” (Poland). This cap won’t cap anything.
But that’s likely by design. The European Commission’s technical staff knows it’s futile to regulate global energy prices by decree. What Europe can do — and Brussels has proposed alongside its cap idea — is to build speed bumps, so-called circuit breakers, that can slow down a rally, but not end it. Germany and the Netherlands are opposed to a price cap — at least, to one that works — because they believe it will endanger the security of gas supplies. The countries that want a hard cap, led by Italy, have failed to explain how their policy will not lead to shortages.
In fact, the only way a hard price cap will work is if EU governments introduce a hard cap on demand. But no one in Europe is prepared to regulate who can consume gas and by how much. So the price cap on that source of energy is doomed to fail.
The real issue underlying the debate is fiscal capacity. Every EU nation knows it will have to subsidize energy consumption — and bail out companies — if gas prices remain high. That’s a likely scenario not just this winter but in the 2023-24 season as well. Germany has the financial muscle to afford the subsidies; other EU nations don’t. The latter need a price cap to limit their spending on energy subsidies. In the corridors of power of Brussels, some diplomats joke, perhaps cruelly, that they fear Germany more than Russia when comes to gas. The solution is EU solidarity: Abandon the cap and pool fiscal resources. But as we can see, the road to the solution has led to the current impasse.
The negotiations over the other cap — on oil — are concurrent but involve a broader set of national interests. The talks are part of a Group of Seven plan to impose an allied ceiling on the price of Russian oil exports as a blow to Moscow. The proposed cap is around $65-$70 per barrel of oil. That range is above where Putin’s crude currently sells.
Again, that’s a price cap that won’t cap anything. And again, that’s the stealthy objective.
Washington and others want to keep Russian oil flowing into the market, so global prices remain below $100 a barrel, even if the tradeoff is that the Kremlin continues to enjoy a strong flow of petrodollars. In Europe, Poland and others want a price cap that defunds the Kremlin, believing it could hasten the end of the war in Ukraine. For them, higher gasoline prices are an acceptable tradeoff.
So what’s the priority? The idea that a price cap at $65-$70 a barrel will have an impact on Russian President Vladimir Putin is ridiculous. With oil production nearly as high as it was before the invasion started in February, the Kremlin is making more than enough money to bankroll its war machine. To defund Putin, the price cap will need to be much lower, and certainly not higher than the $45-a-barrel mooted by European diplomats to their American counterparts. And it will have to be strict. The current plan has more holes than Swiss cheese, with its exceptions to countries from Japan to Hungary.
Can a strong G7 oil price cap end the war? I’m skeptical that Putin can be brought to his knees by simply cutting the petrodollar flow. The same policy didn’t work with Iran and Venezuela, and both countries are much weaker financially than Russia is today. The effect of a tough G7 oil price cap will be awful too: It will lead to $100-plus prices in a global economy already burdened by the highest inflation in 40 years. Big importers of Russian oil — think about China, India and Turkey — will finds ways to continue buying.
There is only one policy that can cut the flow of petrodollars to Putin. That would be a full oil embargo, similar the one imposed on Iraq in 1990 after it invaded Kuwait. The cost in terms of oil prices will be enormous. No one in the West is prepared to implement it. Short of that, however, the G7 oil price cap is doomed to fail.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. A former reporter for Bloomberg News and commodities editor at the Financial Times, he is coauthor of “The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources.”
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