The world as we know it cannot function without oil, giving oil-producing countries an advantage economists call market power. Nations that produce oil are able to set the price, while countries that rely on oil have little choice but to buy it at prices determined by the seller.
While this asymmetry in market power generally favors the seller, in response to the war in Ukraine, a group of global oil buyers are trying to leverage their economic purchasing power to weaken Russia’s strength as a major global oil producer. The European Union and the United States have both imposed bans on the purchase of Russian oil. In solidarity, other nations like Australia and Canada have also decided to not purchase Russian oil anymore.
Now, the G-7 countries – a group of democracies including the United States that try to coordinate global policy – are developing a price cap they hope nations will agree to when paying for Russian oil to further limit Russia’s profits and shrink the income stream that fuels its war with Ukraine. Can a price cap make a difference? And if so, how?
