Analysts are warning that a US-proposed idea being explored by the G7 to impose a price cap on Russian oil could backfire and have devastating consequences. A new report from JPMorgan Chase said that oil could shoot up to a “stratospheric” $380 per barrel if Russia responds to the price cap by reducing oil output.
“The most obvious and likely risk with a price cap is that Russia might choose not to participate and instead retaliate by reducing exports,” the JPMorgan analysts wrote. “It is likely that the government could retaliate by cutting output as a way to inflict pain on the West. The tightness of the global oil market is on Russia’s side.”
The analysts said that if Russia reduces oil output by 3 million barrels per day, it would bring prices up to $190 per barrel. In the worst-case scenario, Russia would slash production by 5 million barrels, bringing prices up to $380 per barrel.
The idea of the price cap would be to deny financing and insurance to ships transporting Russian oil if it’s not being sold at the set price. But the plan is doomed to fail as it relies on the cooperation of Moscow. China and India would also need to cooperate, but they have significantly stepped up their purchase of Russian oil and are already purchasing it at a discount, giving them little reason to cross Moscow.
Despite the serious risks, the Biden administration is still pushing the idea, and it appears to be gaining traction. Sources told Axios that Treasury Secretary Janet Yellen, who came up with the plan, has told her global counterparts that it’s the best way to avert a worldwide recession.
Last week, the G7 leaders released a joint statement that said they are considering banning the shipment of Russian oil “unless the oil is purchased at or below a price to be agreed in consultation with international partners.”