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Restricting the price of Russian oil may be U.S. President Joe Biden's biggest energy mistake, Forbes writes. 

There are two likely consequences of the price cap on Russian oil exports that G7 leaders agreed to in early September, and neither of them is good for policy architects.

The idea behind the price cap is to extend sanctions against Russia to third countries, thereby limiting the windfall revenue the Kremlin gets from higher oil prices, as well as reducing the impact on prices in sanctioned countries. But there are flaws in this thinking.

First, major buyers of Russian oil, such as China and India, are likely to ignore or circumvent the restriction.

Second, the price cap creates significant disruptions in Russian oil supplies, which will cause global prices to skyrocket, keeping Russian oil revenues high and punishing the global economy.

At a minimum, the cap increases supply risk in oil markets, which will ultimately affect oil prices. Although oil is trading at 9-month lows due to fears of a global recession, consumers should not be resigned to current price levels.

The price ceiling is an example of Western politicians trying to get their share of the pie and eat it by dealing with Russia.

The G7 believes it has devised a cunning way to keep Russian oil out of markets outside the EU, which will ban most Russian oil imports starting Dec. 5. Under the agreement, if Russia sells oil at a G7-mandated below-market price, it can still use G7 members' insurance, financing, brokering and shipping services. These services dominate global oil trade.

The G7 - the United States, Britain, Canada, Germany, France, Italy and Japan - are betting that Russia will be so desperate for dollars that it will agree to sell under the price cap system. And even if the consumer countries do not agree to a price cap, Washington believes the plan would give those countries more leverage to negotiate lower prices for Russian oil, which would hurt Moscow's oil revenues.

Ideally, a price cap would ease the continuous flow of Russian oil by keeping prices lower than they would have been under a full embargo and preventing Moscow from benefiting from price inflation caused by supply restrictions.

The plan sounds good in theory, but in practice it is fraught with risk. That's because politicians don't understand the workings and economics of energy markets. The reality is that the price ceiling can easily be circumvented. Ask any oil trader.

Most G7 member countries have either already imposed an embargo on Russian energy exports or are planning to do so, so the restrictions will not affect their imports.

The restriction is aimed at major buyers of Russian oil, such as China, India and, to a lesser extent, Turkey.  These are countries that are either in alliance with Russia (China), worried about their energy security (India), or, in the case of Turkey, a little of both. For them, losing access to Western insurance, financing, mediation and shipping is a problem, but not insurmountable.

Some countries, including Russia, are already intervening to provide alternative insurance for Russian energy exports, allowing energy trade with Moscow to continue.

These third-country buyers may also give the impression that they are playing ball with the G7 by continuing to import Russian energy, simply by paying the maximum price and then paying Russian sellers an additional amount on the side.

Moreover, the Biden administration has already stated that it has no plans to use "secondary" Iranian-style sanctions on Russian oil sales to enforce the cap. These secondary, harsher sanctions could result in offenders being barred from accessing the U.S. financial system.

But even with secondary sanctions, there are workarounds. Indeed, despite the sanctions regimes, significant volumes of Iranian and Venezuelan oil under sanctions continue to find buyers.

Lowering the price cap could also have negative consequences for Moscow.

Russia has already stopped supplying natural gas to Europe via the Nord Stream 1 pipeline, causing gas prices in Europe to skyrocket, with a domino effect on global gas markets. While Russia will never reduce its oil exports to zero, it can reduce them enough to drive up world prices. This lower volume, higher price strategy can keep oil revenues stable.

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