Banning Russia’s oil imports is the easy part. Protecting American consumers is much harder. – Grid News

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Banning Russia’s oil imports is the easy part. Protecting American consumers is much harder.

The White House announced on Tuesday that it would ban the importation of Russian oil, natural gas and coal. The move followed mounting pressure from the public and Congress to exclude the roughly 700,000 barrels per day Russia can sell to the U.S.

It marks a dramatic policy shift from the first days of the war, when such a ban was off the table.

Although the European Union and the United States quickly implemented unexpectedly strong sanctions on Russia following its invasion of Ukraine — essentially impounding Central Bank assets, cutting off major portions of its financial sector from the world banking system — they could not have been clearer about one thing: Russian energy exports would be exempt. Russia could continue to ship its oil and gas, even to countries implementing the other sanctions.

And yet even before Tuesday’s announcement, the global oil market started to seize up. According to data from the Energy Information Administration, American imports of Russian oil fell dramatically following the invasion. Russian oil was even sold at a discount as trading companies, oil companies and insurance and financial market actors grew leery of either the legal or reputational risk of dealing with the country’s energy industry. Shell even felt the need to issue a news release explaining why it purchased Ural crude.

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“I think what you saw last week was the market trying to get its head around not just what sanctions had been enacted but also what was likely to happen in the future,” explained Dan Katz, a former Treasury official and co-founder of Amberwave Partners.

Like so much else in the Ukraine war, the politics of the import ban have been moving very quickly, and they have now outpaced those initial decisions to allow for the trade in Russian oil and gas to continue. On Feb. 24, President Joe Biden said, “We specifically designed [the sanctions] to allow energy payments to continue.” Just four days ago, the Treasury Department issued FAQs explaining how energy businesses could continue if sanctions came.

The impact

The amount of Russian oil that the U.S. imports is typically a small portion of its overall imports — far more oil is imported from Canada, with Mexico being the U.S.’s second-biggest foreign supplier. And that number was shrinking before the announced ban — according to the Energy Information Administration, Russian oil imports to the U.S. have dropped from 138,000 barrels per day a month ago to zero in the most recent week of data.

But in the longer term, Russia’s supply of oil was a key part of the U.S. energy supply that can’t be replaced overnight. Russia’s exports “were less than 5 percent of U.S. total imports of oil products, 1-2 percent of total consumption,” Rachel Ziemba, an adjunct senior fellow at the Center for a New American Security, told Grid, but “even [that] is not negligible.”

The United States is already facing an imbalance between demand for energy — and especially for gasoline — and supply, thus leading to spiraling higher prices. Any move to reduce that supply can only make things tighter for American consumers.

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Now, the U.S., not to mention allies that may have to forgo Russian oil because private actors refuse to deal in it for their reasons, will have to reduce their demand, source additional supply or prepare to endure further spikes in gas prices.

American consumers, despite their own rather small exposure to Russian oil, are already experiencing the effects of a tight energy market. Gas prices have hit an all-time high, with Americans paying an average price of just over $4.10 a gallon, according to GasBuddy.

Making up for the shortfall

“At a high level, there isn’t an enormous amount that the administration can do in the very short run to increase U.S. production. If you magically waved a wand,” Katz explained, “it would still take time.”

While the White House has tried to nudge energy producers to increase output by pointing to the high price for oil, pure exhortation and high prices can do only so much. The White House is trying to find oil supply where it can, sending a delegation to Venezuela — an oil producer and ally of Russian President Vladimir Putin’s — and trying to wrap up a new nuclear deal with Iran, which would unfreeze shipments from that country.

In terms of boosting domestic output, even if the oil industry could reach some regulatory accord with the Biden administration to boost production, exploration and drilling still needs capital from investors.

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“People don’t put millions of dollars at risk based just on the price of oil today. They need to look at a multiyear time horizon,” Katz said.

There’s another issue to consider when it comes to new drilling or exploration in the short term: Like any other massive physical projects, these would be constrained by existing labor and material shortages that are making it hard to find a garage door for a newly built home, let alone drill for oil and gas.

“There are significant labor shortages in the industry, as skilled people have been drawn away from the oil fields,” said Thomas Emanuel Dans, an Amberwave co-founder who served as a counselor in international affairs at the Treasury Department. “They can’t be brought back immediately. There are other shortages, including for drill pipe. I wouldn’t expect very short-term changes in terms of our supply picture. We’re probably short at least 100 rigs in this country. That’s a physical constraint.”

  • Matthew Zeitlin
    Matthew Zeitlin

    Domestic Economics Reporter

    Matthew Zeitlin is an economics reporter at Grid focused on the domestic impact of major stories such as coronavirus, the supply chain and economic volatility.