Petrostates are back in the spotlight. Venezuela has re-emerged as a flashpoint in US foreign policy, and Russia’s invasion of Ukraine continues to unsettle global energy markets. For decades, economists have grappled with the challenges these countries pose. The literature on the ‘resource curse’ highlights how oil dependence can distort governance, consumption (Arezki et al. 2025), and macroeconomic stability in producing countries (see e.g. van der Ploeg and Venables 2012). But a reliance on fossil fuels also creates a dilemma for countries seeking to confront petrostates. Measures that restrict a petrostate’s ability to sell oil risk removing supply from the global market, pushing up prices, provoking domestic backlash in the sanctioning countries, and even increasing the revenues the petrostate earns on the oil it continues to export.

Recent events underscore this tension. For example, when the Trump administration mobilised a naval armada near Iran at the end of January 2026, benchmark oil prices spiked by nearly 10% (CNBC 2026), an outcome that strengthened Iran’s position instead of weakening it.

In recent academic work, we show that this trade-off is not inevitable, and under the right conditions, sanctions can be designed to stabilise global oil supply while reducing the revenues of targeted petrostates (Johnson et al., forthcoming). Our analysis focuses on the G7 price cap on Russian oil (Johnson and Wolfram 2024), but the underlying logic has broader applications.

The Russian oil price cap, introduced in late 2022, was originally met with scepticism. The dominant concern at the time was straightforward: a binding cap would lead Russia to cut production, global oil supply would fall, prices would spike, and the policy would backfire – hurting oil-importing countries while strengthening Russia’s geopolitical leverage (Carroll 2022). This argument drew on familiar basic economics intuition about price controls: when prices are artificially constrained below market levels, suppliers reduce output. Applied to oil, the fear was that any attempt to limit the price Russia could receive would simply induce shut-ins. What this reasoning missed, however, is that oil is not a standard good, produced anew in each period. It is an exhaustible resource, and that fact fundamentally changes how producers respond to price caps (Hamilton 2009, Anderson et al. 2018).

Oil extraction decisions are inherently intertemporal. Producers face a choice between extracting oil today or leaving it underground to be sold in the future. Classic Hotelling logic tells us that the value of an oil reserve reflects not just current prices, but expectations about future prices and their uncertainty. In this setting, policies that alter the distribution of future prices can have powerful effects on current extraction decisions. A price cap does not simply constrain today’s transaction price; it changes the stochastic environment producers face going forward.

Our central finding is that a well-designed and credibly enforced price cap can increase near-term extraction, lower world oil prices, and reduce price volatility. This is not a paradox once the intertemporal nature of oil production is taken seriously.

At the heart of the model is a simple producer decision: extract now or wait. The price cap affects this decision along two distinct margins. First, it neutralises market power. In the absence of a cap, a large producer can withhold supply in the hope of driving prices higher. When a binding cap is in place, however, restricting supply no longer raises the price the producer receives, since that price is capped. Withholding output becomes ineffective as a strategy to increase revenue.

Second, the cap lowers the value of oil reserves left in the ground. By truncating the right tail of the future price distribution, eliminating the possibility of very high prices, the cap reduces the option value of waiting. Together, these forces tilt incentives toward extracting more oil sooner rather than later, especially in the empirically relevant case where oil revenues are a significant but not the only source of funding of a petrostate.

The aggregate implications are significant. The sanctioned country’s supply effectively shifts outward and becomes less responsive to price spikes. When the cap binds, equilibrium world prices are lower than they would otherwise be, not higher. Moreover, because producers are less willing to withhold output in response to demand shocks, price volatility is reduced. These effects run directly counter to the conventional fear that sanctions necessarily destabilise markets. In this framework, the cap acts as a stabilising device precisely because it alters intertemporal incentives, not because it suppresses supply through coercion.

Of course, these results depend critically on enforcement (Cardoso et al. 2025). In practice, the Russian price cap has not been airtight. Oil can be shipped using a ‘shadow fleet’ of tankers operating outside Western insurance and financial systems – the chokepoints the West set out to use to enforce the price cap – meaning that non-Western service providers can facilitate trade at prices above the cap (Fernández-Villaverde et al. 2025). Weak enforcement facilitates this leakage.

In our model, such leakage can both increase revenues to the sanctioned seller and restore incentives to withhold supply, leading to shut-ins and higher prices. We characterise these forces using what we call a ‘sanctions possibility frontier’. For any given level of enforcement, policymakers face a choice between the extent of revenue reduction imposed on the targeted state and the resulting impact on global price volatility. Stronger enforcement allows for substantial economic pressure on the target while keeping price volatility low; weaker enforcement delivers far less economic impact for the same or even greater market disruption.

Recent policy actions suggest an increased emphasis on enforcement. In late October 2025, the Trump administration targeted Russian oil giants, including Rosneft and Lukoil, with sanctions. This raised counterparty risks for buyers, meaning they were only willing to buy Russian oil at significant discounts. We can think of this as equivalent to more purchases covered by the price cap and fewer leaks due to poor enforcement. Actions taken against Venezuelan- and Russian-linked tanker networks similarly raise the costs of operating in the shadow fleet.

Boarding and detaining vessels, as both the US and the French have done recently, does more than directly impede shipments. It changes expectations. Captains face legal risks, insurers reconsider coverage, and buyers worry that contracted supply may not arrive. All this makes it harder to use the shadow fleet to avoid sanctions. Importantly, these steps have occurred without obvious spikes in global oil prices, suggesting that the stabilising logic of the price cap is beginning to operate as intended.

The Trump administration has increasingly focused on persuading India to halt purchases of Russian crude. But a strategy that forces major buyers to disengage with Russia completely could remove significant volumes of supply, drive up global prices, reward Russia, and erode political support for sanctions. In fact, one of the price cap’s key achievements is that it has reduced Russian export revenues without requiring universal endorsement of the sanction’s goals. By permitting continued sales to countries such as India and China at discounted prices, the cap has weakened Russia’s fiscal position while maintaining market stability.

The broader lesson is that sanctions are not merely blunt instruments that trade off economic pressure against market stability. When designed with a clear understanding of producer incentives, they can achieve both objectives simultaneously. The Russian oil price cap illustrates how moving beyond static intuition – a move that analysts have recognised for decades is key to understanding oil markets – opens the door to more effective policy. As governments grapple with the challenge of responding to petrostates without destabilising global energy markets, careful attention to incentives will be essential.

References

Anderson, S, R Kellogg, and S Salant (2018), “Hotelling under pressure”, Journal of Political Economy 126(3): 984–1026.

Arezki, R, H T H Nguyen, and F van der Ploeg (2025), “Easy money, easy spending: A new take on the resource curse”, VoxEU.org, 7 September.

Cardoso, D S, S W Salant, and J Daubanes (2025), “The price cap on Russian oil exports and the amassing of the shadow fleet”, mimeo.

Carroll, J (2022), “JPMorgan sees ‘stratospheric’ $380 oil on worst-case Russian cut”, Bloomberg, 2 July.

CNBC (2026), “ICE Brent Crude (Apr’26)”.

Fernández-Villaverde, J, Y Li, L Xu, and F Zanetti (2025), “Charting the uncharted: The (un)intended consequences of oil sanctions and dark shipping”, NBER Working Paper 33486.

Hamilton, J (2009), “Understanding crude oil prices”, The Energy Journal 30(2): 179–206.

Johnson, S, L Rachel, and C Wolfram (2026), “A theory of price caps on non-renewable resources”, American Economic Review, accepted.

Johnson, S, and C Wolfram (2024), “How to make the price cap on Russian oil most effective”, VoxEU.org, 23 February.

van der Ploeg, F, and A J Venables (2012), “Natural resource wealth: The challenge of managing a windfall”, Annual Review of Economics 4(1): 315–37.