High in the Bavarian Alps, at a special security session, G7 leaders set out to devise an ambitious plan to sanction Russian energy sales. The intent is to reduce Russian profits from oil and gas sales while simultaneously minimizing the damage to developed economies due to rising fuel prices and inflation. A proposed solution of setting a ceiling on the price of oil and gas is a new, untried method, whose goal is to allow oil to continue to flow to low- and middle-income countries while limiting the economic benefit to Russia. While the exact details have yet to be determined, the price cap would be chosen in close collaboration with international allies. What level, if any, should be set for both oil and gas?
From a theoretical economics viewpoint, the proposed plan rests on the assumption that the G7 would be able to execute the ban in unison, essentially forming a monopsony and exercise market power over the Russian Federation. A monopsony, or a single buyer, that controls most of the market demand for a product can benefit from its detailed knowledge of the market structure to obtain a price that is lower than the price that would be available in a competitive marketplace. The market power can be used to forge a wedge between the price that can be obtained in the free markets, and the price that is actually obtained. If they are successful, the marginal benefit to the consumer will be higher than the marginal cost of the producing country, in this case Russia. In other words, the monopsonist can exercise market power to forge a gap between the marginal benefit and marginal cost of oil and gas in the market. The size of the gap, or the level of the price cap, can be (theoretically) estimated by using the elasticity of supply for oil or gas and a mathematical formula called the Lerner Index
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Ukrainian President Volodymyr Zelenskyy, too, has insisted on a cap as low as $30. He said last week that a limit being considered as high as $70 was a "concession" to Moscow.
https://www.businessinsider.com/ukraine-president-zelenskyy-russian-oil-price-cap-europe-sanctions-us-2022-11?utm_source=LinkedIn&utm_medium=Newsletter&utm_campaign=LINewsletter_10ThingsOpeningBell&utm_content=10ThingsOpeningBell
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