Russian oil price cap could push oil to $140: IAGS think tank

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The proposed cap on Russian oil prices is a “ridiculous idea” that could backfire on the United States and other Group of 7 countries, according to the co-director of the Institute for Global Security Analysis.

“It’s a ridiculous idea in my opinion,” Gal Luft told CNBC’s “Squawk Box Asia” on Monday.

“It ignores the fact that oil is a fungible commodity,” he said. The term fungible means interchangeable, implying an equal value between two barrels of oil, for example.

The United States wants to cap Russian oil prices to reduce the flow of funds to the country’s war chest, while lowering the cost of oil to consumers.

Luft likened the plan to going to a store and asking the salesperson to accept less money than the listed price.

“That’s not how the oil market works,” he said. “It’s a very sophisticated market, you can’t drive prices down.”

Those Europeans and Americans who talk about $40 a barrel, what they will get is $140 a barrel.

Gal Luft

Co-Director, Institute for Global Security Analysis

What is likely to happen is that Russia will limit its production and create an artificial shortage in the market, he predicted.

“These Europeans and Americans talking about $40 a barrel, what they’re going to get is $140 a barrel,” Luft warned. Bloomberg, citing people familiar with the matter, reported that the United States and its allies have discussed capping the price of Russian oil at between $40 and $60 a barrel.

“You can’t cheat the laws of supply and demand, and you can’t defy the laws of gravity when it comes to a fungible commodity,” he said.

Oil prices have been volatile and soared as demand rebounded after countries rolled back Covid measures and reopened.

Russia’s war against Ukraine has also contributed to soaring energy prices. To punish Moscow for the invasion, the United States has banned imports of Russian oil, while the European Union plans to impose a gradual embargo.

Meanwhile, some oil-producing countries are struggling to increase production.

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