According to the co-director of the Institute for the Analysis of Global Security, the proposed price cap on Russian oil is an “absurd idea” that could backfire for the US and other Group of Seven nations.
“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 replaceable commodity,” he said. For example, the term interchangeable means interchangeable, implying equal value between two barrels of oil.
The US wants to limit the price of Russian oil to reduce funds pouring into the country’s war storage and lower oil prices for consumers.
Luft wallet plans to go to a store and ask the merchant to accept to pay less than the list price.
“That’s not how the oil market works,” he said. “This is a very sophisticated market, you can’t force prices down.”
He predicts that what is likely to happen is that Russia will limit production and create an artificial shortage in the market.
“The Europeans and Americans are talking about $40 a barrel, what they’ll get is $140 a barrel,” Luft warned. Bloomberg, citing people familiar with the matter, reported that The US and its allies discussed capping the price of Russian oil in the $40-60 per barrel range.
“You can’t fool the laws of supply and demand, and you can’t defy the laws of gravity when it comes to a replaceable good,” he said.
Oil prices have fluctuated and skyrocketed as demand rebounded after countries abandoned Covid measures and reopened.
Russia’s war with Ukraine has also contributed to soaring energy prices. To punish Moscow for the invasion, the US has banned Russian oil imports, while the European Union plans to impose a gradual embargo.
Meanwhile, some oil-producing countries are struggling to raise output.