Expert: Russian oil needs price cap, while gas could have a price minimum

Rosneft logo, gas station.
Rosneft logo, gas station. Source: SCANPIX / EPA

To really affect Russia's conduct, its oil exports should be subject to a price cap, while Russian gas should sport a minimum price instead, Andres Mäe finds.

"A price ceiling would only have an effect on oil," Mäe said when commenting on oil and gas export restrictions for Russia. "It is not as relevant in the case of natural gas because Europe is not buying gas from Russia anymore. A few exceptions remain that do not affect the big picture," he added.

The price cap on oil should be such as to leave Russia without tax revenue while keeping the oil companies alive, Mäe suggested in an interview to Vikerraadio.

"This price ceiling should be above cost price to allow the oil companies to turn a modest profit and keep production going, while there should be none left over for the Russian state budget. Otherwise, the war will continue and the cycle begin anew. That price cap could be in the vicinity of $30-40 per barrel," the expert added.

Natural gas could take a minimum level instead to stop Russia from selling gas below a certain price, Mäe found.

"I believe that instead of a ceiling, gas should have a floor, if we are to stick with this metaphor. Because we should not let Europe go back to relying on cheap Russian gas if and once the war ends and Russia is forced to pay for Ukraine's restoration. We should have a minimum price for Russian gas on the European market just to protect ourselves. "Purely to make sure [gas supply] alternatives would be better available. Otherwise, we could see cheap Russian pipeline gas push out all alternatives, whether LNG or other types of fuels. This would once more see cheap money from fossil fuel exports flow into Russia's coffers and tempt its future leaders into all manner of further ventures," Mäe remarked.

The expert also commented on planned restrictions for Russian oil and gas but admitted their effects are difficult to forecast.

Talking about falling fuel prices, Mäe said it could be the result of dwindling world market demand as coronavirus restrictions are holding back growth in China, while China and India both have enough reserves to keep their refineries supplied. Rumors that OPEC was planning to up production to compensate for oil set to disappear from the market due to Russia sanctions could also have contributed. However, the expert believes the price drop will be temporary.


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Editor: Mait Ots, Marcus Turovski

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