Can Europe fix energy prices?

Since March this year, European states have been facing an energy shock related to the war in Ukraine. The end of Russian oil imports, the strong limit and the foreseeable loss of gases led to sharp increases that caused an inflationary wave of an unprecedented magnitude since the 1980s.

European states are aware of the limitations of the embargo against Russia, which tends to sell its oil and gas to other states. With the support of the United States, they created a system of capping prices, which will probably be applied to third countries. Moreover, within the European Union, states, especially in the East, are in favor of administered price fixing.

Russia’s oil price cap

On December 2, the Member States of the European Union (EU), the G7 and Australia decided to implement a price cap mechanism for Russian oil. They promised not to buy Russian oil above $60 per barrel (or 95% of the market price if it is below $60) to limit Russian profits. Because of the embargo against the latter, this cap has nothing to do with the supply of Western countries.

This mechanism aims to prohibit European, American, British, Canadian, Japanese and Australian companies from providing services allowing the maritime transport (freight, insurance, etc.) of Russian oil to countries that do not apply the embargo (China , India, Brazil for example). This measure should be effective because the G7 countries provide insurance services for 90% of global cargo. In addition, Greece, as well as Malta and Cyprus, are major players in terms of sea freight. If Poland wanted a lower ceiling, Greece and the United Kingdom fought to make it as high as possible. These two states fear the emergence of competitors in emerging countries.

The choice of the ceiling of 60 dollars was chosen to avoid destabilization of the oil market. Down the line, Russia may have had an interest in not exporting, which would have caused prices to rise sharply. But Germany does not want further increases in energy prices that could cripple its industry. On the other hand, Poland, Estonia and Lithuania are in favor of a ceiling of 20 dollars to asphyxiate Russia financially.

A 15 to 20% discount for Russian oil

The latter has struggled to sell its oil since Europe, which buys 60% of its production, decided to stop importing it. So Russia is forced to give its customers a discount of 15 to 20% on the market price. The $60 cap therefore does not really change the situation for the Russian government. This decision is mainly a way for the Europeans to underline their solidarity in the face of Russia.

Is the energy price cap conceivable within the Union?

Fixing Russian oil prices will have little effect on energy prices in Europe, which remain higher than before the war in Ukraine. To limit the impact of the cost of energy, the possibility of fixing the price of oil and gas on a European scale was presented. If it is adopted, this option defended by the States most exposed to increases in energy prices will be possible to preserve the purchasing power of households and the profitability of companies in the euro zone.

From March to November 2022, the value of energy imports within the euro zone increased from 2 to 5.5% of GDP. If governments decided to limit energy prices to their level in March 2022, the cost would be 5 points of GDP. This cap was put forward for the energy supply of Russia-dependent States that do not have sufficient financial resources to offset the effects of rising prices (mainly Eastern European countries, Italy). This pricing solution has several drawbacks. This could encourage energy market players to raise their prices. Although it limits the spread of inflation, this policy is tantamount to support for carbon energies and will slow down the energy transition. Above all, the amount of public expenditure would have increased. Thus the State will be forced to increase the compulsory levies or their level of indebtedness, which is considered excessive.

States are instead trying to tighten the scope of support measures by reducing the value of tariff shields and rebates in favor of more targeted measures aimed at low-income households. The only way for European States to establish a common energy price is to finance this mechanism through a community loan. However, on this topic, no consensus has yet emerged.

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