![]() ![]() Coal, gas and oil supplied by Russia to global markets each have their own short-run marginal costs below which it is uneconomical for Russia to keep supplying them. Every producer of a commodity has a short-run marginal cost of supplying that commodity below which it is uneconomical to supply that commodity. Our methodology to estimate the rents that would not have been captured by Russia in the presence of a price cap is informed by the microeconomics of commodities supply and demand, under the reality that Russia’s fossil fuel commodities supply is relatively inelastic as explained here. ![]() Gas sent to China, a fraction of sales in Europe, is estimated to be 3 to 8 times less expensive than gas sold in Europe. In 2021, 75% of Russian fossil gas exports went to OECD countries, mostly delivered through pipelines: this gas is impossible to divert in the short run to other destinations. Redirecting this oil is a costly endeavor, as we see from current discounts at which China and India are lifting Russian oil. In 2021, 60% of Russia’s oil exports went to OECD countries. European gas demand is less elastic, but increasingly becoming so as alternatives to Russian gas are worked around at a breakneck pace. At the same time, European oil demand is more elastic as oil can be imported through other means, mainly through ships. ![]() Most of Russia’s sales of gas and oil to Europe were historically operated through pipelines conferring Russia little alternatives to sell the respective oil and gas elsewhere, which means that Russia’s supply is rather inelastic. Tax theory suggests that the impact of a price cap, used interchangeably here with tax, depends on the relative elasticity of supply and demand, more exactly on whether alternatives for sellers and buyers are better and available. prices have to be above the marginal price of production to maintain the incentive to supply the good to the market. Price caps work effectively as a tax applied to the supplier of a commodity and need to be carefully engineered so that the supply of that commodity is not affected, i.e. the producer of that good cannot sustainably diminish the production or has few alternatives to sell its goods. Assuming rational economic actors, price caps are expected to work if the supply of a commodity is relatively inelastic, i.e. Price caps are meant to limit the economic rents a resource owner can extract from its asset base above a pre-established level. ![]()
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