Biden Administration’s 6 Big Gambles on a Price Cap for Russian Oil: Part 2

July 14, 2022 Updated: July 14, 2022

Commentary

The Biden administration is currently focused on pushing China, India, and Japan, along with America’s European allies, to agree to a price cap on Russian oil. The goal is to decrease inflation and mitigate the risk of a global recession—but at the expense of a tough ban on Russian oil. This is detailed in part one of this two-part series.

Even if the world’s biggest economies don’t all agree, the attempt to impose the cap will likely drive the price of Russian oil down further than its current discount, from more than $100 to between $70 and $80 a barrel. China and India, in particular, are set to benefit.

They could refine the cheap oil and sell it for market rates at a huge profit.

Empowering China

By increasing China’s profits on Russian imports, Biden’s price cap would empower China, America’s most dangerous long-term adversary. That’s the first of six major gambles that the Biden administration takes by pushing the plan.

The cap could, in theory, hurt Russia if existing bans were left in place, but to the same extent (in their bilateral trade) empower China. We would then jump from Russia’s frying pan into China’s fire.

That risk would be mitigated by excluding China’s importers from the benefit of the price cap. But the administration, which is soft on communist China, has in no way indicated an interest in doing so.

Biden has a virtual meeting with Xi.
President Joe Biden meets with Chinese leader Xi Jinping during a virtual summit from the Roosevelt Room of the White House in Washington on Nov. 15, 2021. (Mandel Ngan/AF/Getty Images)

Empowering Russia

The second gamble is that the price cap will be way above the cost of production and empower Russian negotiators. Russia’s cost of production is between $3 and $10 a barrel. That would leave Russia a profit of as much as $37 to $57 per barrel, even with a price cap.

The difference between the price cap and global market rates would create intense competition in the market for cheaper Russian oil, which would give Russian price negotiators increased leverage over those seeking to buy.

The cap could give Russia’s biggest U.S.-allied importers—including Turkey, Japan, Germany, the Netherlands, and Poland—an excuse to change course from planning for a ban to competing with each other to import Russia’s cheap energy.

Russian President Vladimir Putin could then reward those who supported his political positions—for example, Turkey and Hungary—with sales. These countries could, in exchange, use their vetoes to hamstring the response of NATO and the European Union to Putin’s war.

Weakening Alliance Unity

In addition to pro-Russian countries using their imports and political proximity to Putin to hurt NATO and EU unity, the cap would weaken sanctions agreed by the European Union in June. They required hard negotiating among 27 member states to achieve unanimity. Even Brexit Britain is poised to follow suit.

The Biden proposal could be sold as an intermediate step prior to full EU sanctions that would gradually increase to 100 percent at the end of this year. But the risk, and third gamble, is that it would undermine alliance unity for the tougher ban and its expansion to Asia.

eu-and-ukraine
European Commission President Ursula von der Leyen speaks as she attends a news conference with European Commissioner for Neighborhood and Enlargement Oliver Varhelyi after a meeting of the College of European Commissioners addressing its opinion on Ukraine’s EU candidate status, in Brussels, Belgium, on June 17, 2022. (Yves Herman/Reuters)

The cap would require a reopening of the EU agreement and its weakening to allow for insurance and other shipping services for oil transport below the cap. Currently, all Western services are set to be banned for any Russian oil transport, so ruining the existing deal with a weaker one, or none at all, is a big risk.

Hasten Global Warming

The fourth gamble—a certainty—is that the price cap, designed to increase the supply (and burning) of oil, will increase emissions and hasten global warming. For a short-term inflation fix, America’s party of environmentalists stabs the environment in the back.

This will not only hasten global warming but empower the Democrat far-left, which will be disillusioned with Biden’s center-left energy policy. That increases political polarization and instability in U.S. politics.

Energy Dependence

The fifth gamble is also a near certainty—the weakening of the drive toward energy independence in America and among our allies.

The existing ban on Russian oil and gas facilitates pressure toward energy independence and the increase of domestic supplies from nuclear, offshore oil drilling, shale development, the Keystone pipeline from Canada to the United States, as well as renewables like solar, hydro, and wind.

A price cap would weaken the important planning and moves toward American and allied energy independence.

Future Inflation Risk

The sixth gamble is that lacking energy independence, we kick the can of inflation down the road.

Energy is the biggest component of inflation and arguably drives the worst of inflation in the rest of the economy, including food, which relies on petroleum-based fertilizers, pesticides, and herbicides, as well as transportation and refrigeration that mostly depend on hydrocarbons.

Maintaining American and allied dependence for energy on Russia and the Middle East, which failed to quickly increase supply during our time of need from rising oil prices, invites more inflation crises in the future.

As new domestic energy sources emerge due to a ban rather than a cap on Russian oil, the price of energy in America and among allies would decrease more slowly, but in a reliable and permanent way. With it, inflation could return to a 2 percent target that would be under greater control by our own markets rather than the self-interested decisions made in Moscow and Riyadh.

A Tougher Alternative

Instead of price caps on Russian oil and gas, which continue to reward Putin for destroying Ukraine and the environment, we should stay the course on bans, demand that China, India, and Japan join them, and strengthen our domestic energy sources.

Epoch Times Photo
Pump jacks operate at dusk near Loco Hills in Eddy County, New Mexico, on April 23, 2020. (Paul Ratje/AFP via Getty Images)

We can achieve this through truly tough embargos, secondary sanctions on defecting countries, naval interdiction of Russian oil and gas cargoes at sea, and subsidies for clean and domestic energy sources.

A ban on Russian imports will be more painful and risky in the short term, but standing up to bullies always entails sacrifice. The longer we wait, the stronger and bolder the bullies become.

In expanding the ban on Russian energy, we fight a multi-level battle against global warming and autocrats like Putin and Chinese leader Xi Jinping. Taking an economic hit through energy sacrifices, just as we need that energy to beat the dictators, holds risks (including the multivalent risk of Beijing’s increasing power to manage the international system). Communist China has never led on environmental protections, but it does lead in the restriction of human rights to the point of genocide.

So if we can deprive rather than reward aggressive dictators, while at the same time decreasing emissions and expanding domestic supplies of clean energy, we get multiple wins simultaneously that will ultimately secure and stabilize our energy future, not to mention our freedoms, human rights, peace, and security.

Now is the time to take that bull by the horns.

Read part I here.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

Anders Corr
Anders Corr has a bachelor's/master's in political science from Yale University (2001) and a doctorate in government from Harvard University (2008). He is a principal at Corr Analytics Inc., publisher of the Journal of Political Risk, and has conducted extensive research in North America, Europe, and Asia. His latest books are “The Concentration of Power: Institutionalization, Hierarchy, and Hegemony” (2021) and “Great Powers, Grand Strategies: the New Game in the South China Sea" (2018).