Ed wrote about this yesterday but I was really struck by it last night when Sec. of State Blinken appeared on the evening news and answered a question about the US continuing to buy oil from Russia. Listen to Blinken’s answer:
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I guess it hadn’t fully registered with me before hearing that answer that, even with Russian tanks rolling down Ukrainian highways, the plan is to continue to buy a a significant amount of Russian oil every month.
How much exactly? The most recent figures from the US Energy Information Administration are from last November. In that month we bought 17,855,000 barrels of oil from Russia, slightly more than we purchased from Saudi Arabia. Russia is our third biggest supplier after Canada and Mexico. Those nearly 18 million barrels or oil in November represented about 7% of the total the US imported that month.
As Blinken said, the major concern is that cutting off the Russian oil supply could create a significant problem for the US, sending oil and gas prices spiraling upwards at a time when inflation is already doing the same. Reuters had a story about the US approach which was published Wednesday, just before the invasion began.
The United States is betting that letting oil continue to flow out of Russia, the world’s third largest crude producer, even if President Vladimir Putin fully invades Ukraine, will help keep a lid on global price spikes and help shield U.S. consumers from added pain at the gasoline pump…
“Because oil markets are global – and because the United States is an oil-producing country itself – there’s reason to think that … we’ll be able to get through this without too much damage, but certainly it is something that we continue to watch closely,” an official, who was not authorized to speak publicly, told Reuters.
I think it’s a given that most Americans aren’t looking to put boots on the ground in Ukraine and enter a shooting war with Russia. But given that a majority of Americans do see Russia as a threat, I wonder if the Biden administration hasn’t underestimated what they might be willing to do. Specifically, I wonder if Biden couldn’t have made the case that in order to do all we can short of a shooting war, Americans are going to have to suffer a bit at the pump while we do our best to replace Russian oil with fuel from another source, maybe even by unleashing some of our own domestic suppliers.
Biden was happy to threaten Russia with cutting off Nord Stream 2, the gas pipeline to Germany, but he’s not willing to cut off tankers of Russian oil to the US. And truthfully, I don’t know what the reaction would be if gas hit $5 or $6 per gallon or how long Americans would tolerate it for a good cause. What we do know is that, at least so far, President Biden has decided we’re not going to find out.
There is a wrinkle here which makes this a bit more complicated. The price of oil obviously fluctuates on the global market based on supply and demand. So a major change to our current purchasing would create disruption that would likely send global prices higher and that could actually benefit Putin in the short term? Of course that assumes Putin is still able to sell his oil to someone else at the higher price. But if the US isn’t buying that Russian oil, who would be?
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A review of World Bank and United Nations trade data shows that since lesser sanctions were imposed in 2014 after Russia annexed Ukraine’s Crimea, China has emerged as its biggest export destination.
New sanctions could prompt Russia to try to deepen its non-dollar denominated trade ties with Beijing in an effort to skirt the restrictions, said Harry Broadman, a former U.S. trade negotiator and World Bank official with China and Russia experience.
“The problem with sanctions, especially involving an oil producer, which is what Russia is, will be leakage in the system,” Broadman said. “China may say, ‘We’re going to buy oil on the open market and if it’s Russian oil, so be it.’”
So that may be the reasoning behind the current US policy. If China jumps in to buy up excess oil we refuse to buy, it won’t make much difference to Russia and could actually benefit them if prices go up. But are we sure that’s what would happen?
Oil importers in China, the world’s biggest buyer of Russian crude, are briefly pausing new seaborne purchases as they assess the potential implications of handling the shipments following the Ukraine invasion…
While Russian energy exports were spared from U.S. sanctions, some European banks such as ING Groep NV and Rabobank have begun to impose restrictions on commodity-trade finance linked to the two countries. Others lenders are also scaling back their exposure by limiting the issuance of letters of credit against cargoes that originated in Russia…
Chinese buyers are taking a short pause as they wait for more clarity to emerge in the coming days, said the refiners and traders. Companies don’t want to be caught in a situation where they have no choice but to pay much more to ship a cargo, or be entangled in payment issues, they added.
This suggests China is pretty sensitive to price spikes that result from the invasion. So the idea that China would absorb all that Russian oil if prices went higher may not be such a safe bet. At least we could say it’s not clear what China would do in the short term.
And there’s something to be said for sending a clear message. Cutting Russia off, and possibly getting other western nations to do likewise, would make it clear that we’re not taking half measures when it comes to dictators invading neighboring countries. Plus, in the longer term, it would be better if we weren’t dependent on Russian energy, especially when we have plenty of our own we could develop to replace it.
It’s hard to figure out precisely how much of the Biden administration’s current policy is motivated by shrewd insight into world oil markets and how much is simply a desire to avoid pain at the pump for which their party could be blamed this November. I guess I’ve gotten cynical because I suspect it’s more the latter than the former. If so, then the message being sent by the administration right now is that losing Putin’s oil is a price we’re not just willing to pay for Ukraine’s freedom. And that’s a message that China and other authoritarian states with territorial ambitions are now receiving. There are no easy options here for America but maybe this is a case where there is a right and wrong option.
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