The editors of the Wall Street Journal come out not just for sanctioning Russian oil and gas imports to the United States but for “secondary sanctions”::
Nancy Pelosi has endorsed the idea, and vulnerable House Democrats like New Jersey’s Josh Gottheimer are jumping on board.
“We have the opportunity to cut off Putin’s largest revenue source, to support America’s own energy independence and security, and to work with our allies to stabilize the global energy market to help us mitigate rising energy costs for our hardworking families,†says Mr. Gottheimer.
A U.S. purchase ban would do none of those things. But it would let politicians claim credit for doing something even as they avoid the sanctions that really matter—on any company or bank in the world that buys Russian oil and gas.
Russian energy is exempt from the Swift sanctions against some Russian banks, and the U.S. has declined to impose so-called secondary sanctions against banks world-wide that finance the Russian energy trade. The U.S. has imposed those sanctions on Iran and North Korea, and they are effective.
The case for secondary sanctions on Russian oil exports is stronger than for natural gas, which Europe needs in the near term. The worry is that oil sanctions would send the global crude price soaring even higher than Friday’s close of $118 a barrel.
How high could prices go? Nobody knows. It would depend on how long sanctions are in effect and how long the war in Ukraine lasts. Russian crude is already selling at a discount, and last week 70% of Russian oil exports couldn’t find a buyer due to logistical challenges and sanctions risk.
I agree that, if the sanctions are to have any effect, the United States and other countries must suspend or end Russian oil and gas imports. I’m not certain they’ll have the desired effect anyway as long as China does not cooperate. Won’t the effect of sanctions be to reduce the cost of oil in China? Do we really want to do that?
Additionally, there are practical considerations. Since Hawai’i derives not just its gasoline but the oil used to generate electricity as well from Russia, we need to find a way to replace the Russian oil that Hawai’i needs. I propose a) suspending the Jones Act and b) diverting enough oil from California to Hawai’i to make up the shortfall. It would be a relative drop in the bucket for California and California doesn’t depend on oil for electricity.
A complete embargo on Russian energy exports is impossible. The sanctions are only respected by the EU and a very few other countries. China, India, Iran, and most of Asia, Africa, and South American do not recognize them. Even Mexico and Turkey refuse to implement them. Moreover, Russia is insisting that any renewed JCPOA will not allow for sanctions on Iranian and Russian trade. Gas and oil sanctions were excluded at the insistence of the EU, especially Germany.
It might be noted that OPEC is not expanding production, and is simply reaping the windfall profits. US oil and gas production cannot be ramped up quickly. Shale drilling is very expensive. Companies were losing money at $40/bbl and running on debt. Now the survivors can pay down their debt, and most are electing to do so.
One might also note that shale gas and oil wells have low yields and very short producing lives.
Any serious oil and gas embargo would collapse the EU economy and drive us into recession. Even the sham sanctions in place today have driven oil above $120/bbl this morning. A serious attempt to get Russian oil of the market would likely get oil above $200 to $300/bbl and collapse the world economy.
One of the most perfect examples of the propaganda I have mentioned is in the segment quoted above:
Is that discount from Brent crude, discount from what it was selling for last week, or discount relative to other producers? With the price of oil rising as fast as it is “selling at a discount” could mean almost anything.
The cost of production of Russian oil is estimated to be around $42/barrel. Selling at $100/barrel represents a discount but is still making a tidy profit.
How much of the price of oil is based upon the expectation of sanctions? I am not aware of any new dislocations to supply, but I can imagine a lot of players trying to stockpile oil because of uncertainty. There were runs on wheat products in the Middle East when Ukraine was invaded that were only tampered when retailers posted signs that food stuff was exempt from sanctions. Still, would expect people to take precautions, plus there is more reason to believe that crops might not be seeded and harvested this year in the middle of war. Anyway, my point is may want to decide yes or no definitively and if those who want to support Ukraine can’t or won’t, then “no.”
Shell brought some oil at $85 on Friday – so the discount means Russian oil is selling at the same price as before the war started.
But I noticed the press release associated with the sale had this; Shell did it after coordinating with governments because otherwise there would be physical shortages of downstream products.
Anyways; it’s easy for the US to say we will impose secondary sanctions. This nation isn’t the one facing natural gas prices equivalent to $600 / barrel and electricity prices of $500 / Mwh.
Agree with CO. That is why it has been important to do this in coordination with Europe and other nations involved in the sanctions.
Steve