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ELMAU, Germany — Behind the free-trading façade of the G7, there’s now more than a whiff of Gosplan, the old Soviet central planning committee.
Like price-fixing apparatchiks, leaders of the G7, the world’s industrialized democracies, convened in the Bavarian Alps for their annual meeting with a plan to impose a price cap on Russian oil. Their goal was to cut off revenues that are bankrolling President Vladimir Putin’s war in Ukraine, while also aiming to limit inflation for their own citizens.
French President Emmanuel Macron, however, decided that such targeted market manipulation was not the way to go. Instead, he rolled out a head-spinning alternative on Monday — calling for a worldwide cap on oil prices that would require the cooperation, or coercion, of major suppliers, including countries such as Saudi Arabia and Nigeria that belong to the OPEC producers’ cartel.
The U.S., which originally proposed the narrower Russian price cap and is currently the world’s biggest oil producer, was blindsided by the French plan. U.S. officials at the summit were exasperated, but not surprised by Macron’s plan, and said they believed the French president would ultimately come round but that it might take a while to hash through details and get a deal.
Germany, which is more accustomed to Macron’s pie-in-the-sky proposals, reacted skeptically to the French idea, fearing it would likely trigger artificially-created shortages. It was unclear how France’s negotiation-led approach would convince the kingpins of crude to open the spigots. Problematically, OPEC has already agreed to pump nearly 650,000 more barrels per day in July and August, but that has done little to douse market fears that energy-stoked inflation is now blazing out of control.
Two other G7 countries confirmed that Macron had proposed the idea, but refrained from offering an opinion.
An EU official said Brussels was always willing to consider ideas put forward by the Elysée.
“The point of President Macron was to say … if we have a cap, it should be applied globally, which is a proposal that was made in the room that we need to discuss tonight in sherpa meetings to see what’s behind it,” the official said. “But the logic I understand from the French, and maybe better ask them what really is behind this, is that … we can apply this globally.”
“But you better ask them,” the EU official added. “We can look into any regime.”
Farewell free market
What seemed to require more immediate further inspection was how the leaders of the world’s richest nations — often the loudest promoters of free-market capitalism and of international rules-based trade — suddenly came to disavow their core principles of open markets. Instead, they are now taking up adopting exactly the kind of price-fixing schemes (potentially a cartel structure!) that the rich world has long lectured poorer nations against.
Some economists bluntly predicted disaster.
“I don’t see how this can work because this would be a confrontational move to which producers might react by cutting down production,” said Simone Tagliapietra, an energy analyst at the Bruegel think tank in Brussels. “We can’t have such [an] energy war now.”
Adam Posen, president of the Peterson Institute for International Economics, a Washington think tank, was even more terse. “This is going to fail,” he said in a statement.
An Elysée official said the idea France supports is “that of price moderation through a better market balance, which potentially implies an increase in production. This must be done in a concerted manner with the main buyers and producing countries.”
The G7 powers do in fact have some more ancient pedigree when it comes to panicked experiments in price controls. Indeed, former Canadian Prime Minister Pierre Trudeau, whose son, Justin, the current prime minister, was sitting around the summit table in Elmau, was among those who implemented price caps in an effort to stem the inflation-and-energy crisis that hit in the 1970s.
“We have seen this movie before, back in the early 1970s, during the last bout of inflation exacerbated by the first oil crisis,” said John J. Kirton, a professor of political science at the University of Toronto, who is director of the G7 Research Group. “G7 governments at various times have interfered in what our American friends call the ‘magic of the marketplace.’ We’ve had price controls. We have had price controls under the father of the current Canadian prime minister.”
Pierre Trudeau won election ridiculing an opponent for proposing price controls, only for Trudeau to take office and impose such measures himself. In the same era, U.S. President Gerald Ford rolled out an ill-fated program called WIN, for “Whip Inflation Now.” It failed and became a punchline of jokes on late-night television.
“It’s a known instrument in the G7 playbook,” Kirton said, but he added that the chances of success were remote.
He said leaders should first figure out the problem they are trying to solve. “If the problem is inflation, then the first question is to what extent is it caused by excess demand or insufficient supply — and if it’s insufficient supply, is that the supply chain damage done by COVID and many other things?” he said. “If it’s excessive demand, then it’s the central bank that is your first line of defense.” But, he added, “Price controls generally don’t help much.”
Kirton said there was a scenario that might increase the likelihood that price caps would help: If G7 leaders used the cap in conjunction with releasing large amounts from their strategic reserves. They could then sell the new supply of oil at lower prices. But even that strategy would have a potential political cost by undermining their goal of fighting climate change.
“But even if you are using more of your strategic petroleum reserve oil, or giving a break to Venezuela or conceivably Iran or even Libya to get more of their supplies,” he said, “the last thing this G7 wants to say is ‘Hey, we are going to give a greenlight to using more fossil fuels, to more greenhouse gas emissions.’”
Can’t go it alone
Stormy-Annika Mildner, director of the Aspen Institute Germany and a former head of department for foreign trade policy at the Federation of German Industries, said that a G7-imposed price cap would be of little help if China and India don’t cooperate.
Mildner said it was far from clear that developing countries would see enough incentive to help, and they would potentially impose demands on the G7. “There needs to be something in it for them,” she said.
“I’m not sure if it’s going to work if some of the biggest demanders on world markets aren’t part of this, like India,” Mildner said. “It could have an impact if the EU, Japan, U.S., some other bigger countries join up. But really India needs to be part of this to have enough to turn the sellers’ market into a buyers’ market.”
More broadly, Mildner said the goal of trying to cut off Russia’s oil reserves was more than understandable.
“The idea behind it makes absolute sense,” she said. “Russia is still selling lots of gas and oil, and its income is increasing from the sales because the price has gone up and there’s more scarcity on the markets. So its income is up, its trade balance and current accounts are improving, more money is coming in and Russia can use that to finance the war. It’s counter-productive to what the sanctions are supposed to achieve.”
“Russia’s GDP is going to decrease by 8 percent this year, that is already something but its not weakening the state enough to ensure the effectiveness of the sanctions,” she continued.
“The idea is to combine forces, buyers’ forces, saying they are not willing to pay a certain price on the markets. If prices were going down again, that would be good for internal reasons in the G7 countries, for populations who are suffering high prices for food and energy. It also would decrease financial flows to Russia.”
Mildner also noted the contradiction between lowering oil prices and the G7 message on climate change, and she urged caution because market interference can have unpredictable results.
“You need to be careful with initiative likes this because they can also heavily distort markets,” she said. “But on the other hand, the market is now heavily distorted. And in situations like this you can either hope that the market is going to correct itself, which will not happen this time.”
Kirton said that perhaps the biggest flaw in Macron’s proposal was poor timing — dropping his plan for global price controls on the day before G7 leaders are due to issue their final communiqué and as they are under pressure to wrap up their talks and jet off to Madrid for a NATO summit.
“It may get Macron a good headline, but I don’t think it’s a bold idea whose time has come,” he said, adding that price controls on oil would set a potentially dangerous precedent at a time of rising inflation across all sectors. “The obvious question is if you are going to do it for oil, what else,” he said. “The next big thing is food. Do you do it for bread? Geez. Where does it all end?”
Hans van der Burchard, Jonathan Lemire, Victor Jack and Giorgio Leali contributed reporting.