Oil and gas price caps: why they won’t work. Draghi appears to be an amateur of the markets

Also at the G7, Prime Minister Mario Draghi returned to the issue of the ceiling on gas and oil prices. Unfortunately, it did so in a very confused way, as in recent weeks, and this, paradoxically, made the market nervous and increased the price of oil, which from just over 100 Dollars before the meeting, has returned to exceed 115 with Brent. . Markets dislike cloudiness and uncertainty, and a former central banker should know that.

The problem is that the price cap has not received much support, beyond a generic "Let's discuss it", because it doesn't make much sense, and to tell him flatly that it is an unsustainable idea does not end, internationally.

Let's now separate the oil ceiling from the gas one and consider the two cases separately:

  • the EU has already decided on a partial ban on oil, and therefore the ceiling would not make much sense. Recently there was talk of agreeing a "ceiling" with the other countries that are currently importing Russian oil, namely China and India in the first place, but in this case the ceiling, to be applied ONLY to Russian oil, would not make sense: these two states they already buy with a 30% discount on the reference market price, so they already have a price cap. They might even say yes to the idea of ​​a roof, but, objectively, it wouldn't change anything. The damage to Moscow would be zero compared to the current situation;
  • on gas, which comes from fixed structures, such as gas pipelines, the discussion would have different repercussions, but in any case the effectiveness would be the same. First of all, Russia does not necessarily agree to continue providing us. Up to now, Western countries have always overestimated both their own economic weight and Russia's ability to resist external pressures in the form of tariffs or the like. We have already seen a halving of gas supplies to the EU, in the end Moscow could also decide to turn off the taps, believing that it has already collected enough for the year. Since the roof applies only to the Russian one, this form of pressure would lose its effectiveness, becoming just another European frill. So let's move on to the market problems, for which I refer to a precise explanation by Sergio Giraldo on La Verità. Unfortunately, the spot market for gas TTF, or better “Dutch TTF”, exists in Europe. From the spring of 2021, by the will of Moscow, the gas that arrives in Europe arrives there only on the basis of long-term contracts, there is no longer spot gas that goes on the Dutch market of the TTF. This choice, in the second half of 2021, caused spot prices to explode because there was no raw material, sending the entire European economy into crisis, given that retail prices are then linked NOT to long-term contracts, but precisely to those of the TTF (another genius of the Commission). If a price cap were imposed by the buyers, who would act en bloc, on Russian gas, this could only be much lower than the market price imposed on the TTF. At this point, what would prevent an operator who buys controlled gas from Russia from reselling it on the TTF market, earning a strong profit in a very short time. On the other hand, it would not be possible to put a roof on the TTF where gas from the North Sea and regasifiers is also offered. So, in the end, the “Price cap would not give any relief to consumers, but would turn into a really extra profit for importers.

Honestly, I am amazed that our Prime Minister is stubborn with an idea that cannot work or that, even if it worked partially, would not give any practical advantage. The impression I get is that it is nothing more than a smokescreen drawn in favor of the mass media, always ready for low licking activities. This explains why no other European leader has gone beyond a few words of courtesy in this field.

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The article Oil and gas price caps: why they won't work. Draghi appears to be an amateur of the markets comes from ScenariEconomici.it .

This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/tetti-sui-prezzi-di-petrolio-e-gas-perche-non-funzioneranno-draghi-appare-un-dilettante-dei-mercati/ on Tue, 28 Jun 2022 14:15:17 +0000.