The dismal truth is that Putin is winning the economic war

There is bad policy, and then there is really bad policy. I was wondering when the idea of imposing price controls as a means of countering resurgent inflation was going to make a reappearance, and then sure enough, up it pops at the latest summit of G7 political leaders in the Bavarian mountain resort of Schloss Elmau.

It sounds so simple, doesn’t it? Confronted with out-of-control inflation, all you have to do is limit the prices that producers are allowed to charge, and the problem goes away.

Vladimir Putin with Gazprom CEO Alexey Miller. Russian energy revenues continue to roll in.Credit:AP

Only it doesn’t. Price and wage controls were extensively tried in both Britain and the US during the 1970s; they didn’t work then, and they won’t work now.

Here’s the US economist Milton Friedman explaining why: “We economists don’t know much, but we do know how to create a shortage. If you want to create a shortage of tomatoes, for example, just pass a law that retailers can’t sell tomatoes for more than two cents per pound. Instantly you’ll have a tomato shortage. It’s the same with oil or gas.”

There is not much point in making high prices illegal if the end result is closed petrol forecourts and empty supermarket shelves.

But if you bear with the inflationary shock, eventually it creates more supply and prices come down again.

This most basic of lessons in economics does not appear to have had much impact on the thinking of France’s Emmanuel Macron. What began as a proposed cap on the price of Russian oil and gas, leaving other producers unaffected, all of sudden – and to the astonishment of the world’s largest producer, the US – transmogrified in the mind of the French president into price controls for all oil and gas production.

This is never going to fly, but somehow the idea seems to have crept into the G7’s final communiqué, which reads: “We will take immediate action to secure energy supply and reduce price surges driven by extraordinary market conditions, including by exploring additional measures such as price caps.”

Presumably, the communiqué meant just Russian exports, for it is hard to see how even this might be made to work, let alone a blanket cap. We don’t yet have a world government, however fondly G7 leaders might imagine they amount to one, so imposing such a regime across borders would be well nigh impossible.

Some countries do indeed control the retail price of energy – notably in the Middle East, Latin America and the subcontinent. But to say we won’t allow fuel to be sold above a certain price level is not only exceptionally costly to governments and retailers when wholesale prices are high, but also quite different from the current suggestion of refusing to buy at any more than a defined price. The response from the producer may well be that of simply refusing to sell, as is all too possible with Russian supplies to Europe if buyers are banned from paying the going rate. If that were to be the response, it would send prices higher still.

Putin is progressively losing his Western markets, but at this stage it doesn’t really matter because skyrocketing prices provide compensating rewards.

What is more, the sort of price cap envisaged may or may not be tolerable for low-cost producers such as Saudi Arabia, but it will likely render higher-cost production uneconomic. At a time when the West is furiously trying to find alternatives to Russian energy, this looks particularly stupid.

None of this is to lightly dismiss the scale of the problem the G7 is facing. Sanctions against Russia are all very well, but one of the effects has been to put a rocket under energy and food prices, such that it is sometimes hard to know who sanctions are damaging most – Russia or the West.

In any case, Putin is getting a lot more for his exports of oil and gas than he could otherwise have hoped for. The Russian despot is still in the money, even at the deeply discounted prices he is forced to sell at in Asian markets, and therefore has no difficulty continuing to fund his war in Ukraine.

Russia’s current account is in massive surplus, and the rouble is consequently strong. Moscow did admittedly default on some of its external debt this week, but this had nothing to do with inability to pay. Rather it was because sanctions prevented payment. It was therefore a somewhat meaningless default.

The Western sanctions have helped rise the cost-of-living for consumers around the world. Credit:Getty Images

The dismal truth is that sanctions are not working in the way that had been hoped. Putin is progressively losing his Western markets, but at this stage it doesn’t really matter because skyrocketing prices provide compensating rewards. At the same time, sanctions have greatly contributed to a politically destabilising cost of living squeeze across the Western world. Putin can reasonably claim to be winning the economic war, even if the physical one is in stalemate.

The G7 intention is simple enough – to reduce the amount of money going to Russia while at the same time countering one of the main causes of rising inflation. Yet even if it were possible to impose such controls internationally, the long-term consequences for supply would still be deeply negative.

A number of developers have already threatened to suspend promised new investment in North Sea oil and gas because of Britain’s imposition of a windfall profits tax. A price cap would have much the same effect, but on a grander scale, further undermining the quest for greater energy security.

Even before the pandemic, politically driven net-zero targets had prompted a growing hiatus in oil and gas investment. Collapsing demand for hydrocarbons during the pandemic further reduced the investment required even to keep things ticking over, let alone meet the additional demands now being put on the industry to provide alternatives to Russian energy.

A couple of weeks back, Biden’s White House urged refiners to do their “patriotic duty” by expanding capacity and cutting their prices. The obvious contradiction here went entirely unrecognised. You are unlikely to increase supply if you are also trying to control the price.

Russia could of course take the view that a capped price would be acceptable if it means that Europe and other international markets remain open to its exports. But this would merely bring us back to where we were, as funders of an illegal war that we also condemn. Whichever way you look at it, the price cap idea simply doesn’t add up.

Telegraph, London

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.

Most Viewed in Business

From our partners

Source: Read Full Article