Ep. 102: The economics of sanctioning a petrostate

In response to Russia's 2022 invasion of Ukraine, the G7 imposed a price cap of $60 per barrel on all Russian oil carried by tankers owned, insured, or serviced by Western companies. Many analysts expected the policy to backfire, with some warning that oil could reach $380 if Russia retaliated by cutting production. In a paper in the American Economic Review, authors Simon Johnson, Lukasz Rachel, and Catherine Wolfram argue that tightly enforced caps can actually raise oil output and push world prices down when factors like market power, uncertainty, and financial constraints are accounted for.  Rachel and Wolfram recently spoke with Tyler Smith about why the textbook intuition on price caps fails in Russia's case and how their framework might be used to set caps in the future.