Flaws in the oil buyers’ cartel plan

THE drive to set up an oil buyers’ cartel to strike at Russia seems to be gathering pace. The idea of an oil monopsony has been kicked around since the first oil price shock in the 1970s when Opec tripled the selling price of oil. Now the Biden administration has taken up the proposal as a way to reduce funds that Russia uses to finance its war on Ukraine.

The plan is to set a price cap alongside the December implementation of the European Union’s restrictions on insurance for transporting Russia’s oil. The EU plans to ban seaborne imports of Russian crude and refined fuels. The mechanism to enforce this ban singles out insurance companies that indemnify the ships that carry Russian oil. It is reasoned that since only a handful of US and European firms offer the specialised insurance and re-insurance products for oil tankers and specialist vessels, forcing them not to provide cover will restrict Moscow’s ability to export its oil.

Under the Biden administration plan, participating countries would agree to cap Russian crude at a substantially lower-than-market price. The goal would be to set prices slightly above Russia’s marginal cost of production to cut its profits. The West’s insurance firms would be forced to refuse offer cover for ships that carry Russian oil sold above the capped price.