The Biden administration is trying to find a sweet spot between keeping Russian sanctions on oil and causing a massive jump in oil prices to $200 a barrel or more, and one wrong move could blow up the global economy completely.
Relief at the gas pump coupled with this past week’s news that businesses continue to hire at a blistering clip have tempered many economists’ fears that America is heading into a downturn.
But while President Biden’s top aides are celebrating those economic developments, they are also worried the economy could be in for another serious shock later this year, one that could send the country into a debilitating recession.
White House officials fear a new round of European penalties aimed at curbing the flow of Russian oil by year-end could send energy prices soaring anew, slamming already beleaguered consumers and plunging the United States and other economies into a severe contraction. That chain of events could exacerbate what is already a severe food crisis plaguing countries across the world.
To prevent that outcome, U.S. officials have latched on to a never-before-tried plan aimed at depressing global oil prices — one that would complement European sanctions and allow critical flows of Russian crude onto global markets to continue but at a steeply discounted price.
Europe, which continues to guzzle more than two million barrels of Russian oil each day, is set to enact a ban on those imports at the end of the year, along with other steps meant to complicate Russia’s efforts to export fuel globally. While Mr. Biden pushed Europe to cut off Russian oil as punishment for its invasion of Ukraine, some forecasters, along with top economic aides to the president, now fear that such policies could result in huge quantities of Russian oil — which accounts for just under a tenth of the world’s supply — suddenly taken off the global market.
Analysts have calculated that such a depletion in supply could send oil prices soaring to $200 per barrel or more, translating to Americans paying $7 a gallon for gasoline. Global growth could slam into reverse as consumers and businesses pull back spending in response to higher fuel prices and as central banks, which are already raising interest rates in an effort to tame inflation, are forced to make borrowing costs even more expensive.
The potential for another oil shock to puncture the global economy, and perhaps Mr. Biden’s re-election prospects, has driven the administration’s attempts to persuade government and business leaders around the world to sign on to a global price cap on Russian oil.
It is a novel and untested effort to force Russia to sell its oil to the world at a steep discount. Administration officials and Mr. Biden say the goal is twofold: to starve Moscow’s oil-rich war machine of funding and to relieve pressure on energy consumers around the world who are facing rising fuel prices.
To transport its oil to market, Russia draws on financing, ships and, crucially, insurance from Britain, Europe and the United States. The European penalties, as currently constructed, would not only cut Russia off from most of the European oil market but also from those other Western supports for its shipments. If strictly enforced, those measures could leave Moscow with no means of transporting its oil, at least temporarily.
The Biden administration’s proposal would not affect the European ban, but it would ease some of the other restrictions — but only if the transported Russian oil is sold for no more than a price set by the United States and its allies. That would allow Moscow to continue moving oil to the rest of the world. The oil now flowing to France or Germany would go elsewhere — Central America, Africa or even China and India — and Russia would have to sell it at a discount.
Some economists and oil industry experts are skeptical that the plan will work, either as a way to reduce revenues for the Kremlin or to push down prices at the pump. They warn the plan could mostly enrich oil refiners and could be ripe for evasion by Russia and its allies. Moscow could refuse to sell at the capped price.
Treasury Secretary Janet L. Yellen plans to push for more support for the cap when she meets with fellow finance ministers from the Group of 20 nations — including Russia’s — in Asia in the next week. The American delegation will have no contact with the Russians, a Treasury official said.
But even some skeptics say that the price cap could, if nothing else, keep enough Russian oil pumping to avoid a recession-triggering price spike.
Administration officials say privately that there are signs in oil markets that even in its infant stages, the cap proposal is already helping to reassure traders that the world could avoid abruptly losing millions barrels of Russian oil per day at the year’s end.
And I see we're conducting war with the Rational Actor Theory again, where the White House assumes that Putin is in this for the money. If oil overheats, the argument goes, oil would collapse economies, a global recession would occur, and oil would drop back to $20 again. Putin will then go along with the price cap because not doing so would hurt him far more than the West.
That's a hell of a bet, that Putin will be an active participant in his own punishment.
If it fails, we're looking at a nightmare just as elections are coming up here.
We'll see.
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