Petrostates Usually Benefit From War. Let's Make Sure Iran and Russia Don't

An unfortunate fact about oil markets is that all petrostates profit from violence — whether they perpetrate it themselves or benefit when other petrostates do. And that creates a conundrum for U.S. policymakers: How to punish Iran for its suspected assistance to Hamas without helping Russia during its war on Ukraine?

Our solution: Impose a price cap on Iran’s oil exports. Here’s our thinking.

Russia is one of the largest oil exporters in the world (about 8 million barrels per day; world consumption is about 100 million barrels per day). After its brutal invasion of Ukraine in February 2022, world oil prices rose sharply, from about $80 per barrel to more than $120 per barrel. The main driver was fear that Russian oil would come off the market because of sanctions imposed by countries such as the United States or because of physical disruptions related to the war. In the end, the fear was worse than the reality, and Russia was able to sell its usual oil volumes at a “war premium” created by a conflict that it started. For the first nine months after the invasion, Russia earned almost 50 percent more from oil exports than it had in 2021. Then, in December 2022, the Group of Seven and the European Union instituted a price cap of $60 per barrel on Russian oil and significantly limited Russia’s revenue without cutting off its exports, keeping world oil prices flat.