TIPP Insights: Another absurd stratagem — price cap on Russian oil

(Photo by TOBIAS SCHWARZ/AFP via Getty Images)


Imagine going up to the biggest seller of a commodity in a market (one whom you’ve been punishing and ostracizing for his unlawful actions), laying down a new set of unfavorable terms, and expecting him to cooperate. The conversation is likely to go like this:

Still, you walk up to him and say: “We will continue to punish you, indeed isolate you so that you won’t even have your prized corner spot in next year’s flea market, but we adore your product. We want to buy tons of it, but at a price we set.”

The seller, intrigued, asks: “After all the things you guys have done to me, I don’t want to talk to you until you apologize and restore things back to the way they were. That aside, suppose I am interested. What would be that price?”

You respond: “Glad you asked. We want you to sell it to us at your cost price. We don’t want you to profit from the deal. Your agreement will help us tremendously in the short term. We will then have regrouped fully and kick you out of this flea market.”

This kind of unserious proposal is making its rounds at the G7 meeting in Bavaria. First championed by Treasury Secretary Janet Yellen at a Congressional hearing last month, it is finally apparently ready for prime-time consideration.

As scholarly articles emerge about the causes of the current conflict between Russia and Ukraine, it is becoming evident that many policy decisions made since the previous G7 meeting regarding Crimea have contributed to the current situation. University of Chicago political scientist John J. Mearsheimer, in a lengthy article in The National Interest, concludes not only that the United States is principally responsible for causing the Ukraine crisis, but faults the Biden administration for doubling down against Russia.

Enraged by Russia’s actions in Ukraine, the West began playing to the Twitterati by announcing one throat-choking sanction after another. The initial tranche – such as freezing Russian assets and cutting off major Russian banks from SWIFT – was designed to hurt Russia. Some Western intermediary financial institutions would be affected, but not much.

But today, the sanctions have taken an unexpected turn, severely hurting the West and many nations not connected with the conflict, more than Russia. Europe, the center of the world’s green movement, is planning to restart coal-fired power plants as its embargo on Russian energy is crippling the continent. Germany is concerned that homes and offices may not have sufficient supplies of natural gas to keep the country warm during the winter. The OPEC+ nations have refused to pump more oil into the market, causing President Biden, who declared Saudi Arabia a pariah nation two years ago, to travel to Riyadh to beg for more oil.

With prices sky-high, Russia is making more in oil revenues than before the war, even after selling at 30% discounts to India and China, who have refused to support the West. The impact of the West’s sanctions has been that Americans, paying record-high prices at the pump, are subsidizing motorists in China and India.

Americans have been told sacrifices are worthwhile to punish Russia and isolate it. But neither goal is within reach, and the evidence points to the contrary. The Ruble today has appreciated 34.6% against the dollar while the Pound and the Yen have fallen. Russia has plenty of cash to pay its debtors, and the only reason Moscow has defaulted on its obligations, to the glee of the liberal media, is that the West has blocked the channels for those payments. For most people in finance, it’s a newspaper headline without merit. Furthermore, the country is firmly in control of nearly 20% of eastern Ukraine, rich with oil and gas assets and access to almost all the Black Sea ports.

If there’s one thing we have learned from the war, it is that, despite some initial setbacks, Putin has far outsmarted the collective leadership of the West. Russia will likely dismiss the Western proposal for an oil price cap as absurd and desperate. It is in Russia’s economic interests to keep oil prices so high that even at the 30% discount that Russia sells oil to India and China, Moscow is making a tidy profit and financing its war.

If Russia agreed to the American proposal, a solid source of Russian war funding would be gone. With excess Russian oil, world oil prices would decrease, helping the West, but lower oil prices hurt Russia. A shrewd politician like Putin is likely to laugh it all off.

The G7, with only a tenth of the world’s population, is a powerful force with outsize influence. In a strongly-worded statement, the G7 leaders stated, “We will continue to provide financial, humanitarian, military, and diplomatic support and stand with Ukraine for as long as it takes.”  But, by not engaging in sensible discussions to end the war, the free world’s leaders are inflicting pain and suffering on nearly a billion people.

No one denies that Putin triggered it all in the most-brutal attack on humanity since Hitler. But the G7 has the power, and an obligation, to save the world from needless death, famine, and destruction. It is shocking that unserious proposals such as the price cap, which will only further lengthen the war, are being hailed as worthy solutions to an intractable problem.



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