The summer driving season is here again, and U.S. motorists are feeling real pain at the pump as gas prices continue taking out fresh highs. The national average for unleaded gas hit a new high of $4.67 per gallon on Wednesday, with the average price at $4 per gallon or above in all 50 states for the first time ever. President Biden is scrambling to lower gas prices ahead of the midterm elections, but is short of options after the historic release from the Strategic Petroleum Reserve of 1 million barrels a day for six months did little to slow the oil price rally.
The situation is not any better in Europe, with energy prices skyrocketing as the world contends with supply chain bottlenecks, Russia's invasion of Ukraine, and the lingering effects of Covid-19 lockdowns.
OPEC has not been of much help, either, although the Wall Street Journal has reported that some OPEC members are exploring the idea of suspending Russia's participation, which could pave the way for Saudi Arabia, the UAE, and other OPEC producers to pump significantly more crude.
But Italy's prime minister, Mario Draghi, has hatched an even more radical plan to contain the oil price rally.
The former European Central Bank president has floated the idea of creating a "cartel" of oil consumers at a meeting with Joe Biden in order to increase their bargaining power, similar to how the biggest oil-producing nations came together through OPEC to agree on annual oil production quotas.
The two met at the White House on Tuesday to coordinate their positions on Russia's invasion of Ukraine and the economic fallout from the conflict.
"We are both dissatisfied with the way things work, in terms of oil for the US and in terms of gas for Europe. Prices don't have any relationship with supply and demand," Draghi has said.
According to Brussels think tank Bruegel, since September 2021, Germany, France, Italy, and Spain--four of the largest EU economies--have each spent €20bn-€30bn to artificially lower energy prices. However, these subsidies are viewed as less than ideal since they help to fund Moscow, drain public finances and harm the environment.
Source: CNN
Oil Price Cap
Draghi and Biden have also discussed implementing a cap on wholesale gas prices, an idea pushed by Italy within the EU for the past three months.
Indeed, Italy has managed to get many EU states on board for an oil price cap, but is facing strong opposition from the Netherlands and Germany, two of the largest importers of Russian oil.
The EU executive is also not buying it.
According to the European Commission, an oil price cap should only be a last resort for an emergency, such as in the event Russia cuts off all gas to the EU. The EC's decision appears to have been swayed by a cross-section of analysts who have argued that caps could imperil the EU's climate goals, by encouraging more consumption of fossil fuels.
Related: Why You Should Care About The Price Of Diesel
Roberto Cingolani, Italy's minister for ecological transition, is not taking the opposition lightly: "Countries that oppose [the idea] defend the concept of a free market … this free market has allowed gas prices to increase five or six-fold without there being a real physical reason, for example a shortage, which has affected the cost of electricity. Citizens are unable to bear the costs, and businesses suffer the high energy costs of manufacturing," he has told the Guardian.
But it appears European leaders are more receptive to the idea of creating a natural gas buyers' cartel after the EU agreed in March to use the union's considerable heft to get better gas prices.
"We have important leverage. So instead of outbidding each other and driving prices up, we should pull our common weight," the European Commission president, Ursula von der Leyen, has declared.
ADVERTISEMENT
This probably makes more sense, considering that more than 40% of EU gas and 25% of its oil came from Russia before the Ukraine invasion.
On Monday, the European Union agreed on a partial ban on Russian oil imports, which immediately covers more than 2/3 of oil imports from Russia, according to European Council chief Charles Michel.
That said, other plans to curb the price of crude could end up gaining traction and becoming a reality considering that some high-powered figures in Germany are open to the idea.
Last week, Germany's economy minister, Robert Habeck, revealed that the commission and the U.S. were working on a proposal to cap global oil prices.
Meanwhile, Michael Bloss, a German Green MEP, has suggested that the EU should create an oil consumers' cartel with other developed countries, including the U.S., UK, Japan, and South Korea, which represent "a huge share of oil consumption" on the global market.
"If they together say this is the price we are going to pay, but not more, the sellers, they will have to abide by it … This special time needs special action."
By Alex Kimani for Oilprice.com
More Top Reads From Oilprice.com:
- Oil Prices Rise As EU Leaders Agree On Partial Russian Crude Ban
- Where Are Oil Prices Headed?
- Gazprom Cuts Off Gas Supply To The Netherlands
For instance, OPEC was not able to prevent prices from falling in the 1980s even after it adopted the production quota system in 1982. Moreover, OPEC was neither able to temper oil prices in 2008 when prices rocketed to $147 a barrel nor was it able to stop the 2014 oil price crash.
If oil prices are skyrocketing it is because of robust global demand, tight market and a shrinking global spare production capacity including OPEC+’s.
Therefore, the idea floated by Italy’s Prime Minster Mario Draghi of creating a cartel of oil consumers is a non-starter for the simple reason that If the consumers cartel say to the producers this is the price we are going to pay, the buyers will reply by saying tough either you take it or leave it. And since consumers can’t leave it because they need oil for their economies to function, they will be forced to pay the price the market dictates.
The same logic applies to the other non-starter suggestion of capping gas prices. A gas producer like Russia sells its oil at the maximum price the market can tolerate. If the EU tries to force a cap on the gas price, Russia will simply halt supply. And since there is no alternative to Russian gas supplies, consumers will be forced to accept the market price.
The price impact of the EU’s ban on Russian seaborne crude oil exports estimated at 1.95 million barrels a day (mbd) fizzled out after Russia immediately found buyers jn Asia. The Brent crude oil price initially shot up to $124 a barrel but since then it declined to $113.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London