Anyone for a price cap?

What do caps, controls, floors, and ceilings have in common? They are all attempts to keep the prices of goods from going above or below a set amount. Emperor Gaius Diocletian, back in the third century AD, was the first on record to try to set a maximum price, a price cap, on goods for his fellow Romans. He was in no way able to enforce his idea and everyone just ignored it. A bigger fiasco example is perhaps from Brazil, which during its period of crazy, extreme inflation tried to put a max price on foodstuffs: Farmers outside of the city actually hid their cows to avoid having to sell at the set price.

We may now see if the EU can do it better. Talks are set to begin Friday on the seriously acute energy cost crisis and its possible remedies at the EU level. The factors that need to be taken into account are many: The price of electricity in Europe still closely follows the price of gas even if the electricity source is different; Russia recently turned off its natural gas pipeline coming into Germany, Nord Stream 1, but Russian gas (natural and crude) is still coming into Europe because of previously signed contracts (good because there are some very gas-dependent EU countries); There are ongoing gas deliveries by cargo ship and pipelines through Turkey and Ukraine – and the price for it is crippling.

Will it work?

Setting a price cap for Russian oil and gas is the main thrust in Brussels. The price cap idea has been pretty widely ridiculed because caps so rarely work as intended (see hiding cows). However, some Foreign Policy magazine writers, among others, are coming out in favor of it. A price cap now, they argue, would mitigate the shock and the even worse heating costs that the upcoming February 2023 ban on Russian refined oil products will no doubt incur. A price cap would keep the oil flowing into global markets (though with less profits for Putin) keeping the rest of the world from freaking out and going into an economic tailspin.

The FP writers also believe that while gas hungry nations like China and India won’t officially join the price cap crowd, they’ll be happy using it to negotiate for an even lower price than what Russia’s currently offering them.

In addition, getting on the wrong side of both US wishes and EU sanctions can be costly for other countries. No one was thrilled about the anti-terrorism financing sanctions the US initiated after 9/11, but financial institutions around the world stepped up to meet them anyway. Smaller actors that try to sneak around import bans, or even neutral parts, will soon find their Russian-oil filled ships difficult to insure as most of the insurance companies are in the EU and follow the playbook.  All in all, the EU’s price caps may have holes, but not big holes.

Finally the elephant that everyone is talking about, inflation, will very likely be lessened if the price of oil and gas actually drops, either through price caps or something else. (Who knows, though. Economic correlations have been so wacky since covid.)

You blink first

Russia has threatened they’ll turn off the tap entirely rather than sell at a lower price, even though oil and gas exports are their major source of income. The writers, and many others, are counting on Russia blinking – on them taking the capped price that’s being offered. On them keeping the flow of gas moving. On them needing the revenue so badly they won’t do anything drastic.

It’s a really big game of chicken, one that is all about Ukraine. One side is betting Russia will sell gas at the capped rate because they need the money to fund the war they started, and the other side is betting that when Europe gets really cold, and really broke, they’ll crack on the sanctions. Who will give? As the Swedes say “those who live will see.”

PS. What will Sweden do to aid its citizens this winter? After the election on Sunday, we’ll find out.