Thread by @karim__fawaz

Why is #OPEC so worried about the price cap?

Short answer: it's not about the specifics of this proposal, which is trying to add a back door to a disruptive EU sanctions regime. It’s about what a price cap mechanism (even imperfect) would *mean*.

A thread 👇🧵

#OOTT

An effective price cap would provide large consumers (i.e. the West) with a functional and tested foreign policy tool that fundamentally changes the leverage balance that has defined oil markets for decades.

Longer answer below

1. Through modern oil market history, larger oil producers operated under the implicit framework that they had "energy security immunity" - in other words, there is such a thing as "too big to sanction".

There are exceptions (Iraq, Iran, VZ) but it takes something overwhelming to warrant direct oil sanctions, and usually w/explicit blessing of Saudi Arabia (Iraq invading Kuwait, Iran nuclear enrichment)

2. Sanctions on oil have been binary (flows or nothing) – after the failure of oil-for-food, the only tried-and-true mechanism to target oil revenues is by cutting off flow via secondary sanctions. The cost of secondary sanctions on large producers is prohibitive.

An effective price cap would represent a mechanism to target oil revenues specifically without having to resort to secondary sanctions or direct targeting of oil volumes/flows.

3. Necessity is the mother of invention: out of desperation, consumers and esp. the US have discovered in 2022 that there are paths to oil market intervention beyond pleading with OPEC. The SPR is one, and the price cap may become another.

Having gotten a taste of it, there’s no sign of going back. The more tools consumers have in their oil market intervention toolbox – the harder it becomes for OPEC to maintain price and political leverage.

Effective targeted sanctions & price cap on one of the largest oil exporters in the world that keeps oil flowing but prices set in Washington and Brussels shifts the unspoken red lines.

Where the US sees a carrot, OPEC sees a stick that could eventually be pointed its way.

More broadly, oil and gas markets are being deconstructed, commercial and political relationships are being redefined and the rules of the game are changing.

OPEC clearly does not like the direction in which it’s heading but fighting the tide may just accelerate it.

The price cap on Russian oil may very well prove ineffective for a variety of enforcement, adoption and retaliation reasons. But it reflects a creative effort to develop a new tool in the West's oil foreign policy arsenal, and for OPEC, that's something to worry about. #OOTT