Cable news and Twitter are aflame with outrage today that Treasury Secretary Janet Yellen proposed price caps for oil. Fortunately, the rumors are false. Yellen’s proposal is for Russia only, would likely have little effect if enacted, and falls well short of any reasonable definition of a price control. Is her proposal a good idea? Probably not, but it’s also either a nothingburger or close to it.
My colleague Iain Murray pointed out in an email that given the timing, Yellen likely has the upcoming G7 summit in mind. Russia’s invasion of Ukraine is at the top of the agenda, and Yellen’s proposal is aimed at oil from Russia, and nowhere else. Her likely goal, as Iain put it, is to hurt Russia without hurting Germany. It’s about foreign policy, not economics.
Instead of a price control, Yellen proposes limiting the amount of financing and insurance coverage that U.S. allies, and other countries with good relations with the U.S., may provide for Russian oil shipments. How much effect that would have depends on the value of those financing and insurance caps, and on financiers’ risk tolerance. Russian shippers could also find financing and insurance from elsewhere, negating any impact from the allied members’ caps. Assuming Yellen’s plan works, there are three likely outcomes:
- Partially full Russian oil tankers sell less oil, but at the world price.
- A larger number of smaller oil tankers, some of which might be repurposed from other uses, ship the same amount of oil at the world price, though with higher shipping costs.
- Full Russian oil tankers sell the same amount of oil at a reduced price, in order to fit under new financing and insurance limitations.
Yellen’s proposal is also mostly redundant. America has already banned Russian oil imports, as has Canada. The European Union, with the exception of right-populist and Putin ally Viktor Orban of Hungary, agreed in May to ban 90 percent of its Russian oil imports by the end of 2022. Those actions have already raised oil prices. Any additional effect at the margin from Yellen’s proposal would be small.
That said, there might be some downstream effects on oil prices. If Russian tankers sail half-full, then resellers of banned Russian oil, such as China and India, might have a smaller supply to offer the global market. That would raise global oil prices by a small amount.
If smaller ships get repurposed, displaced goods could see higher prices and shipping delays. Those are difficult to forecast, but even these effects would be small, since Russia has limited non-oil exports—many of which are sanctioned anyway—and is banned from the SWIFT international payment system.
If Russian tankers remain full but sell oil at a reduced price, then China, India, and other resellers will have an opportunity for windfall oil profits—giving Putin a source of leverage for retaining those countries as allies or at least keeping them neutral. If that happens, then Yellen’s proposal would backfire, though again, the total effect would be small in the context of the global oil market.
It’s debatable whether Yellen’s insurance and financing caps for Russian oil are a good idea or not. Either way, they’re small potatoes, and likely redundant. And contrary to hyperventilating cable news pundits, she has not proposed capping oil or gas prices.
Which brings us to this post’s other piece of advice: Don’t watch cable news.