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The U.S. Buys Little Oil From Russia. Its Ban Will Still Have Big Consequences

9 minute read

World leaders are confronting tough questions about how to support Ukraine and beef up sanctions against Russia. But when it comes to cutting off Russian oil—one of the country’s biggest exports— there’s no consensus, even among NATO countries that are working to present themselves as a united front.

On Tuesday, President Biden announced that the U.S. would pull the plug on Russian oil. The move comes after pressure from both Democrats and Republicans mounted in recent days to ban Russian imports as President Vladimir Putin escalated attacks on Ukraine. The U.K. is entertaining a similar idea, Prime Minister Boris Johnson announced on Monday, which would detach the country from Russian energy sources. At the same time, other European countries including Germany and the Netherlands have no immediate intentions of immediately shutting off oil pipelines, though the European Union announced on Tuesday that it would cut gas imports from Russia by two-thirds this year.

Ultimately, no country will have the benefit of sitting on the sidelines when one nation makes a move. The supply chain is far too interconnected to isolate just one economy, though some countries are more vulnerable to supply chain disruptions than others. What’s less clear is just how tight supplies will get and whether governments will mitigate the pain by upping fossil fuel production or leaning harder into green energy.

Russia is the world’s third largest producer of liquid fuels according to the U.S. Energy Information Administration, which is why Ukraine’s president, Volodymyr Zelensky, has tried to rally support for an international boycott. While all NATO countries may want to heed that call to show support, it’s more feasible for countries like the U.S. and U.K. to actually go for it. They get about 3% and 8% of their crude oil imports from Russia, respectively. Germany and the Netherlands, on the other hand, rely on Russia for more than 30% of theirs. Conversely, the U.S. is not a critical trade partner for Russia—only 1% of its crude oil is directed to the U.S., while more than half goes to Europe and Eurasia.

The U.S. is in no position to cripple Russia’s oil industry on its own, particularly if its major customers keep the pipes flowing. But the U.S. ban is not ineffective, either. The move will tighten the squeeze that Russian energy companies are feeling as private companies cut them off, and it could spur other nations to follow suit. That pile-on could be a serious blow—one that Russia may try to salve by selling to other nations such as China or India.

Oil prices jumped in recent days following news of private-sector bans and growing anticipation of tougher government policies. American drivers are now paying $4.25 per gallon on average at the pump, according to the AAA gas price tracker. Prices are likely to increase further as the ban take effect—and not just in the U.S.

“If we cut off a source, it’s going to affect Europe a lot more than it’s going to affect us, but it affects the whole supply because of the fact that it’s a global market,” says Steven Cohen, director of the research program on sustainability policy and management at Columbia University’s Earth Institute. Indeed, Europe has a lot more at stake because it is tied so much more directly to Russia. The situation could become especially dire if Russia cuts off supplies in retaliation against the oil bans, as Russia’s deputy prime minister Alexander Novak threatened in a statement on Monday. In such a case, oil prices, which are hovering around $130 per barrel, could spike to $300 per barrel, he said. (In such a case, U.S. pump prices could increase by another $2, given that the price of crude accounts for more than 50% of the retail price of regular gasoline in the U.S.)

Read More: Why President Biden Banned Russian Oil

The U.S. will now need to replace the loss of its Russian supply, which served two main functions in the U.S. market. First, Russian oil alleviated challenges related to transporting oil to certain states, particularly those on the West Coast. Second, crude oil from different regions carry different properties and U.S. refineries are not designed to process every type.

“Generally speaking, U.S. refineries are designed to process heavy crudes. Now, this has changed over time, but most of the production in the U.S. is light oil,” says Frank Macchiarola, senior vice president of Economics and Regulatory Affairs at the American Petroleum Institute.

In Macchiarola’s estimation, Russia crude is not critical to overall U.S. supply. “All the crude from around the world is replaceable—but at a cost,” he says.

As supplies tighten, it’s unclear how much price pressure countries can withstand. Some European nations have no appetite to test the limits and are treading very carefully so they don’t end up in a desperate situation. German Chancellor Olaf Scholz noted on Monday that Russian energy supplies are of “essential importance” to maintain services that German citizens rely on every day. Dutch Prime Minister Mark Rutte backed up that sentiment at a press conference in London later that day. “The painful reality is that we are still very much dependent on Russian gas and Russian oil,” Rutte said, adding that cutting off supplies would have “enormous ramifications” for Europe and the world.

That sentiment may change as the world finds other energy sources. But there’s no way to avoid price pain in the interim. When the market reacts to embargoes and sanctions, the impact is immediate. When the energy industry reacts to them, it takes months for new capacity to come on line. That delay is expected for both renewables and fossil fuels.

“Rebalancing supply and demand takes time,” says API’s Macchiarola. In some ways, the shock and uncertainty of the situation is like early in the pandemic, when demand plummeted and the situation was unpredictable. “You just couldn’t flip a switch and shut off all supply, so it took some time for production to match up with this vast shift in demand. What you see here is very similar. Supply is not keeping pace and all of a sudden there’s a massive disruption.”

Read More: Russia’s Ukraine Invasion Could Break Oil’s Grip On U.S. Politics

Countries are looking to replace Russian fuel in different places. World leaders released 60 million barrels of oil from stockpiles last week—about half from the U.S.’s national reserves and the other half from other nations in the International Energy Agency—which is the equivalent of only about two weeks’ worth of Russia’s crude exports. Some European nations are doubling down on their commitments to transition to clean energy. The U.K. is among them, but may also integrate a plan to extract more fossil fuels. Similarly, the E.U. will both look for other gas suppliers and reduce consumption as it weans off Russian gas.

To stabilize global markets as quickly as possible, the Biden Administration is seeking replacement oil supplies—looking to countries like Saudi Arabia, where oil production is on par with Russia, as well as Venezuela and Iran, if a nuclear deal comes to pass there. Lawmakers from both parties have criticized the possibility that the U.S. would engage with autocratic regimes while simultaneously choking off Putin.

In the U.S., Republicans in particular have capitalized on the growing support for an oil ban by calling for more drilling. House Republicans introduced a bill to reauthorize construction of the Keystone XL pipeline. The Biden administration has been open to bolstering both the country’s green technologies and drilling capabilities. In his address on Tuesday, Biden called for more renewables so that “tyrants like Putin won’t be able to use fossil fuels as weapons against other nations, and it will make America the world leader in manufacturing and exporting clean energy technologies.”

The Earth Institute’s Cohen says falling back on fossil fuels—buying oil from other nations and boosting drilling at home—is the more likely and immediate path for the U.S. in the short term because renewable technologies are still in development. But he believes that the Ukraine situation will accelerate the green transition in the long run. When fossil fuels are expensive, cheaper green sources become even more attractive. Consumers may become more willing to invest in solar panels to hedge against energy price fluctuations, or drive more electric vehicles to avoid sticker shock at the pump, for instance.

“We have a moral crisis here. You have to do things in the short run, like pump more oil or whatever it is, to deal with this crisis,” Cohen says. “One of the things that people are concerned about is the climate issue will take the back seat for a while to this issue. Well, it should. We’re going to fix climate change—we have no choice—but lunatics like Putin create an existential crisis for the world. And so, it’s okay to put other issues aside for a while, while you deal with this one.”

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