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To Counter Putin, Biden Tries to Assemble an Upside-Down Cartel


MUNICH — President Biden is leading an effort to manipulate the oil market at a scale the world has rarely seen, embracing cartel-like tactics in an aggressive but risky attempt to undermine Russia’s war effort in Ukraine.

At the Group of 7 nations meeting this week in the Bavarian Alps, Mr. Biden has attempted to assemble an upside-down version of OPEC, the world’s most powerful oil cartel, with the goal of soothing consumers burned at the gasoline pump and, if the allies get their way, helping to speed the end of the war.

Instead of limiting supply to maximize revenues for countries selling oil, as a cartel does, Mr. Biden is trying to minimize how much one particular seller — Moscow — reaps from each barrel. He led his Group of 7 counterparts to agree on Tuesday to a plan that would cap the price of Russian oil, as a way of driving down the revenue President Vladimir V. Putin is deriving from his most important export.

“Some people are calling it an inverse OPEC,” said Simon Johnson, a Massachusetts Institute of Technology economist who has been involved in discussions about how such a cap might work. “This is a cartel that is attempting to discriminate between Russian oil and other oil, creating a wedge, which may or may not drive down global prices.”

The plan is an economist’s invention — specifically Janet L. Yellen, the Treasury secretary and former chair of the Federal Reserve — and nowhere near fully baked. It is theoretically quite powerful, so much so that Prime Minister Mario Draghi of Italy is pushing hard for Europe to adopt a similar price cap on imports of Russian natural gas.

Some energy experts doubt the price cap would work, if negotiators can even agree on how to structure and implement it. Potential problems abound: Big buyers of Russian oil, like China and India, might refuse to play along. Mr. Putin could decide it would be more lucrative to cap some Russian wells, pulling a million barrels a day or more off the world market, creating a shortage that would cause prices to spike even further.

But Biden administration officials insist the plan is their best chance to deprive Mr. Putin of cash for his war effort and possibly relieve some pain for American drivers.

“Limiting the cost of Russian oil will put downward pressure on global energy prices,” Ms. Yellen said in a news release, “in a way that dampens the impact of Putin’s war on the U.S. economy.”

To understand why the West has settled on this complicated, untested idea for its latest attempt to combat both Russian aggression and the rising inflation that has swamped global consumers, it is helpful to revisit some basic economics.

After Russia invaded Ukraine, the United States and its allies moved to ban imports of Russian oil in retaliation, hoping to cut off the key source of revenue for its war machine. But global prices soared in response, outweighing the loss in the volume of Russian sales, and Moscow’s oil revenues continued to flow in.

That price spike is the sort of thing that can happen when oil producers collectively decide to pull supply off the market. Those producers are using their large power over the market to effectively pick the price that is best for them. That price is higher than an efficient market would set. Consumers suffer the consequences.

What the Group of 7 is trying to do is a similar show of market-power force, but in the opposite direction. The price cap idea that the finance ministers now have to develop would seek to keep Russian oil on the market, in order to avoid further strains on global supply and spiking prices. One analyst firm, Barclays, projects prices could reach $200 a barrel by next year if most of Moscow’s exports were knocked offline.

The crux of the price cap is that the West, which controls much of the means and financing that Russia currently needs to ship its oil, would assemble a coalition of oil buyers and private companies in fields like insurance and shipping that would essentially give Moscow an ultimatum: sell your oil at a steep discount, or don’t sell it at all.

In a best-case scenario, that ultimatum would be issued swiftly, backed by a broad coalition of countries and private companies. The price of oil might fall quickly, if traders expect Russian oil to keep flowing to the market, more cheaply, for the near future.

In their final statement from the summit, the Group of 7 leaders said that they would consider “a range of approaches,” including “a possible comprehensive prohibition of all services, which enable transportation of Russian seaborne crude oil and petroleum products globally, unless the oil is purchased at or below a price to be agreed in consultation with international partners.”

The leaders, President Emmanuel Macron of France said after the meeting, want to “better manage oil and gas prices” by “freeing up more volume but also by having a concerted discussion between major buyer countries.”

The sheer quirkiness of the plan — its inverse logic and the opening it leaves Mr. Putin to simply shut down exports to the West — underscores the frustration the United States and its allies feel that the measures taken so far have not blunted Russia war efforts.

There are a lot of reasons this effort might fail, too. Officials cannot yet say how many buyer countries would need to sign on — or at least, not actively seek to undermine the plan by making side deals with Russia — to guarantee effectiveness. They also cannot say how quickly the details could come together, and how negotiators like Ms. Yellen might bring entire industries, like oil tankers and shipping insurance, on board.

Political pressures could complicate the details. Asked about the price cap after the summit, Chancellor Olaf Scholz of Germany called it “very ambitious and demanding,” reflecting the likely difficulty of reaching an agreement on the idea among the 27 member countries of the European Union.

Some analysts say the sheer complexity that slowed the Group of 7 leaders’ embrace of the plan could blunt the market reaction the leaders are hoping to engineer.

“The price cap policy would not put Russia under the immediate fiscal stress many expect,” Mark Mozur, a market analyst for S&P Global Commodity Insights, wrote on Tuesday. “Nor can markets be expected to interpret a potential cap the way the Biden administration might want them to.”

Perhaps the most elemental danger is that the leaders will set the wrong cap for the price — one that fails to minimizes Mr. Putin’s profits and potentially pushes a lot of oil off the market. The political backlash in that case could be immense. In the energy world, it is a familiar fear: Cartels don’t always calculate correctly — and they are not always as powerful as they imagine.

Reporting was contributed by Melissa Eddy from Garmisch-Partenkirchen, Germany, Aurelien Breeden from Paris, and Alan Rappeport from Washington.



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