It is properly capped in Germany and Europe. There should be an oil price cap and, from the point of view of many EU countries, also one on the gas price. Germany is discussing price brakes, which some like to call a “cap”. It is a jungle of ideas that is becoming more and more impenetrable every day. Which of these have chances – and what it brings for private households and the economy.
Why do governments and the EU want to cap energy prices?
Since Russia invaded Ukraine, gas prices in particular have skyrocketed, and oil is also much more expensive than before the crisis. This brings Russia higher revenues, while consumers and businesses in Europe suffer. Upper limits should help against both problems.
What does an oil price cap bring?
On Thursday, European governments approved the eighth package of sanctions against Russia, after their EU ambassadors in Brussels agreed on the details of the sanctions the day before. Among other things, the package creates the legal basis for implementing a price cap for Russia’s oil exports all over the world. Tankers should only be allowed to transport the raw material if the oil was not sold too expensively. A month ago, the finance ministers of the G7, i.e. Germany, France, Italy, Great Britain, Japan, Canada and the USA, agreed to work on such a cap. Now the EU as a whole is participating. This should significantly reduce Russia’s income.
However, this has no consequences for European consumers, because an import ban on Russian oil transported by tanker will come into force in December anyway. Oil can only continue to flow to Hungary, the Czech Republic and Slovakia via the Druzhba pipeline, but that only accounts for a good tenth of exports to the EU. Consumers in emerging markets in Asia and Africa would benefit from the price cap. This is also one of the goals of the measure, because the rapidly rising world market prices are a major problem for these poorer countries.
How will the oil price cap work?
The plan starts with ship insurers: oil tankers with Russian goods are only allowed to take out insurance and use other services in G-7 and EU countries if the oil was not sold at a price that was too high, for example to Asia or Africa. In addition, for the first time there is a ban on EU shipowners, for example from Greece, from transporting Russian oil anywhere in the world – unless the raw material is sold cheaply enough. A committee of the G7 and their partners will determine how high the price limit is. After that, the EU governments have to agree again. The ban is due to come into effect in December for crude oil and in February for refined products.
Is it that easy to implement?
Resourceful shipowners will certainly try to circumvent the ban. For example, Greek tankers could change their flag and then fly the flag of a Caribbean country. However, these ships could not obtain insurance from an insurance company in a Western country if they were carrying oil that was sold at a high price. This in turn would mean that many ports will refuse entry, because an insufficiently insured oil tanker is a big risk. After an accident, an oil spill threatens with enormous damage. But it is clear that there is no complete protection against sanctions tricks. Still, the move will cost Russia’s oil industry revenue and make life even more difficult.
Should the EU also cap the price of gas?
In a letter to the EU heads of state and government, Commission President Ursula von der Leyen outlined what further steps the EU is planning to take against high energy prices. A wholesale gas price cap is mentioned as an option. This cap will apply to purchases and sales by companies and utilities in the EU. If the public utilities then have to pay less for their gas orders, this will also reduce consumer bills. 15 governments, including France and Italy, have asked the Commission to work on such a cap. The Brussels authorities have long warned of the risks, but now von der Leyen is bowing to the pressure and is at least open to it.
However, this does not mean that agreement on such a limit will really succeed. Because there are no convincing concepts of how something like this can be implemented throughout the EU. Instead, economists and experts on the Commission warn of the dangers. An artificially reduced price will fuel demand, even though the states actually want to reduce consumption. If there is not enough gas, the market can no longer decide who will be awarded the contract. Normally that would be the highest bidder, but the price is fixed. The EU governments would therefore have to agree on how the shortage would be distributed – that would be tricky. In addition, gas importers would accumulate massive losses if they order the raw material at the world market price but only resell it in the EU at the capped price.
What else can the EU do about the high prices?
In her letter, von der Leyen mentions other options: In the future, the gas price that power plants pay could be subsidized in the EU. The expensive gas-fired power plants have so far been driving up the electricity price – the move is intended to mitigate this. Something similar is already being implemented in Portugal and Spain. However, the disadvantages are also evident here: the subsidies are not only expensive, but have also led to higher consumption of the scarce raw material by the power plants.
In addition, von der Leyen announced that negotiations with gas suppliers such as Norway would be intensified. The Commission would like to agree on lower prices, which should move within ranges. Some member states are pushing for the EU to set its own upper limits for import prices. But the Commission prefers negotiations – except for Russian gas, where the agency itself has proposed a cap.
What has Brussels already done?
Last week, the EU energy ministers approved a law that forces member states to skim off the high profits from cheap power plants, such as those from green and nuclear power providers. The government plans to do that anyway. In addition, the EU countries have to introduce a one-time special tax for oil and gas companies because they also benefit from the increased world market prices. The proceeds are to flow into aid programs for citizens and companies that are particularly suffering from energy prices.
How do the EU projects fit into the federal government’s “double boom” package?
Only moderately – which is why many Europeans accuse Berlin of cooking its own soup again. In fact, part of the 200 billion package flows into a kind of cap on the gas price: the federal government is thus absorbing the additional costs of those gas importers who had previously purchased Russian gas and now have to replace it on the world market at great expense. The bottom line is that the importers do not have to pay more than what is stated in their contracts with Russia – they had previously registered 34 billion euros for this compensation. And now there are the planned relief for consumers and the economy: the gas price is also to be artificially reduced.
Hasn’t Germany long since decided on a gas price cap?
In fact, the term “lid” keeps haunting the German debate, but it doesn’t actually fit. There are no plans for a maximum price for each cubic meter of gas, but for a price reduction, possibly only for part of the consumption. “Price brake” hits the mark better. A federal commission of experts is currently brooding over what exactly it should look like, and the results should be available next week at the latest. There are plenty of options – from a general discount on every kilowatt hour consumed, around four cents, to a reduced basic quota for every household to per capita quotas. The following already applies: the more precisely this brake works, the more complex it becomes. Conversely, this means: If things are to be done quickly, they will have to be rough. But of all the cover ideas that are currently circulating, the brakes are likely to pull the fastest. However, only for consumers in Germany.