However, market fluctuations are one thing. Direct intervention is something else. In times of crisis and panic, however, the decisions to be made are rarely of the popular variety. Gas price caps in the European Union are perhaps the best example so far. About fifteen members of the bloc supported the idea of capping the price of imported natural gas. This sounds like a popular decision. However, it is decidedly unpopular among suppliers of that natural gas, including Norway, Qatar and the United States. One of the notable opponents of an EU-wide gas price cap has been Germany, which is also the bloc’s largest natural gas importer. A price cap “there is always a risk that producers will sell their gas elsewhere,” Chancellor Olaf Solz said in comments on the cap, effectively summing up the biggest problem with artificially capping prices. The biggest problem is that this cap constitutes direct government intervention in the way markets operate, which prevents them from continuing to operate. And this is in danger of real collapse. If we look at price caps as a kind of subsidy – in the way that Germany implements its own price caps, with lower gas and electricity prices for a certain level of consumption – the picture and the risk may become clearer. Subsidizing a product or service usually leads to greater demand for that product or service. But if supply is tight—and gas supply to Europe from producers other than Russia is indeed tight—market prices would rise. This means that governments subsidizing the product or service will have to pay more to subsidize it. And that, in turn, would lead to higher taxes because the money has to come from somewhere. In the end, consumers end up paying more anyway, just in a more roundabout way. This is an extremely fragile system, as evidenced by the collapse of the former Soviet bloc economies after the fall of their totalitarian governments and the return to free markets where prices were determined by demand and supply after years of heavy subsidies. It wasn’t a pretty picture. Meanwhile, as EU leaders mull over their caps, the G7 has announced it will be ready with a price cap for Russian oil within weeks. Apparently, the idea of having a floating price has been rejected in favor of a fixed price, which will be imposed by insurers and financial service providers resident in group members. However, many questions remain unanswered. These were most recently summarized in this Reuters article, which reported that what the G7 is betting on is primarily the fact that 95 percent of the world’s shipping fleet is insured by the International Protection and Indemnity Group, based in the U.S. KINGDOM. If these insurers refuse to cover Russian cargoes, then those cargoes go nowhere. Of course, commentators have noted that buyers could also insure cargoes, meaning that China and India could continue to receive Russian oil in significant volumes as long as they can secure ships, which may also be a challenge. However, the very fact that the world’s seven richest countries have come together to cap the price of the world’s most traded commodity is a big deal: in some ways, it’s a larger-scale market intervention than the idea of a price cap. of EU natural gas. And that makes it potentially more dangerous. If Russia goes ahead with its plan to stop selling oil to countries with a cap, it could lead to further cuts in its oil production. This, in turn, will shrink the already tight global supply, pushing oil prices higher and contributing to the inflation the entire world is struggling with. The bigger risk, however, is that these price capping initiatives open the door to more consistent market intervention in the future. If it could happen once, it could happen again, and each successive time would be easier and probably feel more natural. And if this kind of intervention becomes chronic, so to speak, it would mean the end of even the illusion of the free market and the beginning of a new era. By Irina Slav for Oilprice.com More top reads from Oilprice.com:
