(The Hill) – The U.S. could survive cutting off Russian oil and gas imports over Moscow’s invasion of Ukraine, but it would almost certainly strike a massive financial toll.
Political support for banning Russian energy imports is growing in both parties, and the White House said the topic is under discussion — though it said President Biden had not made a decision.
Oil prices are already skyrocketing, and the Brent crude oil international benchmark hit a 13-year high of $139 per barrel on fears of a ban after Secretary of State Anthony Blinken said the U.S. was engaging in an “active discussion” about the possibility.
Russia is one of the world’s largest oil producers, with a 12-percent global market share, according to a Friday analysis from JPMorgan.
Prior to the invasion of Ukraine, Russia was exporting about 6.5 million barrels daily, of which 4.3 million barrels per day was going to Europe and the U.S. The U.S. was importing about 600,000-800,000 barrels from Russia daily — or about 8 percent of the country’s supply of crude oil and petroleum products.
Cutting off that spigot will lead to higher prices unless more supply comes from somewhere.
It’s possible that the Organization of the Petroleum Exporting Countries (OPEC) could decide to increase supply, but there has been no indication from such countries that they will produce and export more oil to replace Russia’s, the JPMorgan analysis warned.
“The Biden team is already calling Saudi Arabia, the UAE and others I imagine,” said Morgan Bazilian, director of the Colorado-based Payne Institute for Public Policy. “But their diplomatic leverage on those countries is limited, and they have shown very little appetite to be influenced by Biden and the U.S.”
Relations between Saudi Arabia and the Biden administration are decidedly chilled following Democratic criticism of the killing of former Washington Post journalist Jamal Khashoggi, who is widely believed to have been murdered by Saudi agents.
Prince Mohammed bin Salman, also known as MBS, who is the day-to-day ruler of Saudi Arabia, also recently told The Atlantic in an interview “I do not care” whether Biden misunderstood things about him.
Senior U.S. officials also took a rare trip to Venezuela, another OPEC member, this weekend for talks about potentially easing sanctions on oil exports from that country.
Another option to take the pressure off a ban on Russian oil would be to increase U.S. shale production, although that growth would be limited by the necessary labor and infrastructure demands, according to the JPMorgan analysis.
It is more expensive to produce oil from shale fields in West Texas than Saudi Arabia. The higher international prices could lead to increased production in the U.S. given the economics, though relief at the pump would be a bigger question.
“Saudi Arabia is famously known for having the cheapest, cleanest crude oil — it takes the least amount of additional refining, very cheap to process, and it’s very cheap to get out of the ground,” Gernot Wagner, a climate economist and visiting professor at Columbia Business School, told The Hill. “West Texas crude is a lot harder to get out of the ground.”
Whereas it only costs about $5-10 per barrel to extract Saudi Arabian oil, digging up West Texas crude costs about $70 per barrel, according to Wagner.
“So it only really pays to get it out of the ground if the oil price is well above those $70,” he said.
Bazilian warned that a ramp-up in domestic production would face a variety of hurdles, such as the time it takes to start pumping, financial restrictions imposed by Wall Street and an insufficient workforce.
Another wild card that could help fill the gaping hole left by Russia poses its own set of complications: Iran.
If the 2015 Iranian nuclear deal is restored, it could lead to the waiving of U.S. sanctions, enabling Tehran to ramp up its crude supplies by 1 million barrels per day over the next two months, the JPMorgan analysis stated.
Bazilian described as “deeply flawed” the notion that cutting off Russian oil could lead to “energy independence.”
What would be more sensible, he argued, would be to focus more on energy security — a mix of supply, demand, markets and institutions — while finding a way “to entice the U.S. industry in the short to medium term.”
“That will be tough for an administration who has climate change as a top tier priority,” Bazilian said. “Of course, that priority is not top tier today.”
Echoing these sentiments, Wagner likened a pivot away from Russian oil sources to a switch from a fast-food hamburger to a highly caloric vegan burger.
“It still produces CO2 emissions,” Wagner said. “It’s still going to give you a heart attack. It might even be worse for you right at the end of the day because we don’t really know what eating vegan burger does to you.”
And that sense of uncertainty is dominating global energy markets right now — in large part, Wagner explained, because “we don’t know what Putin’s going to do next.” But from a purely economic perspective, he said there are certain advantages to cutting off Russian oil altogether.
“You basically rip off the risk premium,” Wagner added. “Suddenly, there’s no uncertainty about what Russia will do next, because it doesn’t matter.”