Matthew Lynn

    Macron’s Russian oil plan is bound to fail

    Price caps almost never work

    Macron’s Russian oil plan is bound to fail
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    It will drain Vladimir Putin of funds for his war machine. It will bring down inflation. And it might even be enough to stop the global economy from tipping into recession. As President Macron put forward his wheeze for solving the energy crisis this week, he no doubt had plenty of persuasive arguments. He appears to have brought the rest of the G7 on board for his plan for a global cap on the price of oil. There is just one problem. Like most price controls, it is not going to work. Indeed. It will only make the crisis worse.

    Of course, everyone can see where Macron is coming from. Ever since Russia invaded Ukraine, and embargos started to be placed on its energy, the price of oil has soared. From $74 a year ago it has risen to $117 a barrel and could go a lot higher still. Not only is that fuelling inflation, sending the price of filling up a typical car to over £100, it is also enriching Russia, as Kate Andrews wrote in the magazine last week. Macron has a very French solution for that. We will just impose a price cap, limiting the amount that can be charged. Problem solved. Formidable, as they might say in the Élysée Palace.

    Here’s the snag. It is easy to announce a price cap. It is harder to enforce it. As it happens, apart from the United States and Canada, none of the G7 are major oil producers (the UK could be if it wanted to, but has chosen to ban fracking and is harassing North Sea producers into decline instead). Even more significantly, almost none of them are net oil exporters. Indeed, only Canada is of any significance, ranking as the seventh-largest producer of oil in the world. But as it happens, almost all of its oil goes across the border to the US.

    In fact, none of the G7 are significant net exporters on any scale at all. To make the price cap stick, the G7 would have to persuade the major exporters to play along. Since they are led by Saudi Arabia and, er, Russia, followed by Iraq, the UAE and Nigeria, that doesn’t seem very likely. All of them like high oil prices since it allows them to make lots of money. Even worse, by controlling the price the plan would simply deter investment, creating even more shortages, and inevitably higher prices down the line. Perhaps Macron expects net importers to refuse to pay over the agreed cap. But good luck convincing countries like India – which has been conspicuous in its increased purchase of Russian oil since the invasion – to stop buying much-needed energy. 

    In truth, Macron’s G7 oil price cap is just another exercise in political grandstanding. It is not going to actually happen. And it wouldn’t really fix the problem even if it did. If the G7 really wanted to fix the energy crisis, it would ease the restrictions on fracking so that supply could be increased. And it would dramatically increase the investment in alternatives fuels such as wind, solar and nuclear. But that would take hard work, and a plan that lasted beyond the next headline – and that would hardly interest the current crop of G7 leaders.