Recently, the U.S. had brought up the discussion of putting a cap on Russian oil prices. The main reasoning behind this is to reduce funds flowing into the Russian war chest while bringing down the cost of oil for consumers.
Although this might seem like a good idea in plain view, experts like Gal Luft who is the Co-Director of the Institute for the Analysis of Global Security criticized the idea in an interview held by CNBC’s “Squawk Box Asia” on Monday, calling it a “ridiculous idea in my view,” and, “It ignores the fact that oil is a fungible commodity.”
The term fungible means that it is interchangeable, implying an equal value between two barrels of oil, for example.
Luft went on and gave a brief parable of how the idea is similar to when an individual goes to a shop and then asks the seller to accept less money than the listed price. “That is not how the oil market works. This is a very sophisticated market, you cannot force the prices down,” he said.
He further predicted that the plan will backfire and Russia will restrict its production and create an artificial shortage in the market. “Those Europeans and Americans that are talking about $40 a barrel, what they are going to get is $140 a barrel,” He warned.
Luft is not the only analyst that is skeptical of the plan to impose a price cap on Russian oil. Other market watchers had pointed out that India and China may not cooperate with the price cap because they have been buying discounted Russian oil.
At the G-20 summit held in Bali last week, U.S. Treasury Secretary Janet Yellen stated that the cap would be crucial to help bring down inflation.
However, a day after the U.S. Treasury Secretary delivered her speech, Indonesia’s Finance Minister Sri Mulyani Indrawati in an interview with Martin Soong of CNBC gave a different point of view on the matter, stating that the energy problem is on the supply side and “Putting a cap definitely is not going to solve the problem, because it is about the quantity which is not adequate, comparing to the demand which is in place.”
Sri Mulyani furthermore stated boldly that the Russian-Ukraine war is the cause of the whole disruption of oil and energy supply and the implementation of the war sanctions towards Russia created an even more complex situation.
