Will energy price caps work?
Probably not
The EU - and the G7 - have moved towards price caps on oil and gas. Several proposals have come forth. However, unless there is global agreement, they appear doomed to failure. Let us look at the proposals and the issues.
Gas price caps
The EU has floated the idea of caps on either (1) Russian gas, and/or (2) all LNG imports. Neither seems to have sufficient support int he EU to succeed.
A cap on Russian gas is doomed to failure. Gas is relatively less lucrative for Russia than is oil. Thus, Russia has threatened to stop all gas exports to Europe should their be a gas price cap. This is a credible threat as Europe would lose more from this than would Russia. Hungry, Slovakia, and Austria have all warned that such an action would cause a recession. Further, Credit Suisse has reported that EUR 27 billion of Russian energy imports are inputs into EUR 1.9 trillion of German outputs. Thus, the damage to Europe from losing Russian gas appears larger than the damage to Russia from cancelling gas exports.
A price cap on all LNG would fail. It is clear why. LNG shippers would simply sell LNG to any market that offers $1 more. This would catastrophically reduce Europe’s LNG supply and render Europe even more dependent upon Russia. Should Europe implment such a cap in conjunction with a cap on Russian gas could leave Europe devoid of natural gas supplies.
Oil price caps
The main oil price cap proposal is on Russian oil. There is little credible talk of a wider oil price cap. A wider oil price cap has little chance of succeeding as it would harm US companies and OPEC would not accede.
The oil price cap proposals are relatively inchoate at the moment. However, it would appear to be operationalized by banning shipping and insurance for transport of Russian oil above a certain price.
The price cap would likely fail. This is because it is unlikely to have wider buy-in. At present, it appears to be a G7-led initiative. Pressure on third party countries appears unlikely to succeed. It is implausible that China or India would acquiesce to a price cap under threat of sanctions. Indeed, China would likely retaliate in kind. Additionally, non-sanctioning countries need only offer slightly above the cap in order to dominate Russian oil exports. This would take Russian oil out of supply. In turn, this would hike the price of non-Russian oil (as oil supply for sanctioners would have fallen). This would ultimately harm the sanctioning countries and exacerbate inflation.
Energy price caps in general
Could countries then impose energy price caps in general? As indicated above, a cap on imported energy supplies would fail. Therefore, any price cap would need to be at the utility level. Or, it would need to be operationalized through government susidies. We can look at several situations.
A cap on energy prices in general has issues. This is espeically so with the EU-originated proposal to cap energy prices for renewables and/or impose super-profits taxes on renewable energy providers. The obvious issue is that this would deter supply.
A price cap at the utility level can create its own problems. This reduces the utilities’ profitability. This can force government bail outs and/or nationalization (see e.g., France and Germany). It would also reduce utility-level maintenance. Rendering such companies unprofitable would deter investment and increase government costs.
The UK’s model appears the most viable. This involves the government subsidizing the difference between the price cap and the wholesale energy price. This is still likely to harm utilities’ profits. However, it will harm them by less than forcing the utility to operate at a loss. It would also reduce the risk of the utility entering bankruptcy and causing disruptions.
Overall then we can see that most energy price caps are not workable. Certainly, regulators must consider how rising prices influence the cost of living. However, many of the energy proposals are simply unlikely to solve the energy crisis.