The US Bans Russian Energy Imports – Symbolically

As Russia’s war in Ukraine intensifies, the Biden administration banned Russian oil and natural gas purchases. This move represents a departure from initial Western sanctions against the Kremlin, designed specifically to avoid interference in Russian energy flows – particularly to import-dependent Europe. Oil prices have skyrocketed since Ukraine was invaded on February 24, with Brent and WTI oil futures trading at around $117 and $114, respectively (down from a 13-year high of $130 earlier this week),

Biden reportedly had deliberated for days before imposing the embargo as higher gasoline prices hurt him and the Democratic party politically. Although the Biden-led initiative to sanction Russian oil sales is rather symbolic, it is still important.

The US could produce all oil it needs, and what it can’t, it could import from North America. America has flirted with net-oil exporter status over the past few years and by all accounts produces enough oil domestically to be entirely self-sufficient. In 2020, the US produced 18.4 million barrels of oil per day (bpd) and consumed 18.12 million barrels per day that same year. 2021 was a similar picture.

This is the result of the decade-long shale revolution and Covid’s downward pressure on oil demand. In 2020 the United States enjoyed temporary net exporter status – selling more crude on foreign markets than it was purchasing.

However, what little the US does import, it does so mainly for geographic and technological reasons. Total imports of crude oil and petroleum products have decreased over the years. In 2010 US total imports were equivalent to nearly 11.8 million bpd, compared to 8.4 million bpd in 2021. But because the US exports more than 5 million bpd, its net imports are roughly 3 million bpd.

Most crude imports originate from Canada, Mexico, and Saudi Arabia. Canadian supply represents half of America’s foreign oil purchases, while 8.4% comes from Mexico, followed by 5.1% from Saudi Arabia.

Russia is not even a top 3 supplier of US oil imports.

Russian crude accounts for around 3% of US imports, or 200,000 barrels a day. That number jumps to 8% of imports when refined products like gasoline and diesel are factored in. The US economy is simply not heavily reliant on Russian energy.

Moreover, with historic sanctions on both Iran and Venezuela, the US turned to Russia to meet the need for heavier grades of crude to produce fuel at maximum capacity at older US refineries designed for this type of fuel. Ironically, the US is now looking towards Venezuela and even Iran (after the JCPOA nuclear deal is renegotiated and finalized) as possible sources of heavy crude, further demonstrating that Russian oil is replaceable. Although today’s announcement that negotiators suspended their efforts to revive the 2015 nuclear accords puts Iranian oil exports into question.

But while a US embargo on a few hundred thousand barrels per day of Russian petroleum products might not be a big deal for the Russian or American economy, things will change significantly if Russia’s top buyers in Europe follow US leadership.

Roughly 40% of Europe’s gas and more than a quarter of its oil is supplied by Russia. In 2020, the EU imported $105.4 billion worth of Russian goods – mainly oil, gas, and metals (iron, aluminum, nickel). Europe could not replace the large amounts of energy it receives from Russia in the short term. For this reason, it is highly unlikely that we will see an EU embargo on Russian oil.

But stranger things have happened, and unity on this issue would have massive consequences for Europe and the aggressive Russian petro-state.

On a global scale, Russia exports about 5 million barrels a day of crude and an additional 3 million barrels of refined products. It is the 2nd largest exporter of crude oil behind Saudi Arabia, exporting $72.6 billion worth of crude oil in 2020. In terms of Russia’s total export revenue in the last year, crude oil accounted for $110.2 billion, oil products for $68.7 billion, pipeline natural gas for $54.2 billion, and LNG for $7.6 billion. Energy exports are a vital source of revenue for Russia, followed for arms exports and nuclear reactors.

If European countries were to follow the US example and ban Russian oil and gas imports, the Russian economy would feel the effects. The ruble has already fallen to a new record low, and interest rates are at an all-time high of 20%. If hypothetically, Russia’s biggest consumer of oil and gas were to break all ties, the country would lose over 50% of its GDP, amounting to the loss of billions for the economy (total oil and gas revenue equaled around 9.06 trillion rubles to the federal budget in 2021). However, if some European countries decide to sanction Russian energy, Moscow could sell its oil to China or India at considerably discounted rates. This means that we should not expect all Russian exports to simply disappear from the global crude market even in the event of a European embargo.

President Biden has been reluctant to impose an embargo on Russian oil, sending gas prices and inflation even higher. The sheer news of the potential Russian oil ban sent gasoline prices skyrocketing, with the average price per gallon of gasoline reaching $4.17 on Tuesday. Soaring gas prices coupled with rising inflation (7.9% in February 2022, the highest rate in 40 years) means the US may undergo a recession in the upcoming months.

Western sanctions against Russian energy will, in turn, likely lead to even higher inflation levels as there is a strong correlation between high oil prices and inflation. Oil is a major industrial input used in the production of vital goods and commodities such as diesel, gasoline, asphalt, and plastics. In a recent poll, two-thirds of Americans were critical of the president’s response to rising prices. More inflation and higher oil prices will adversely impact Biden’s already tenuously supported administration, and his approval ratings ahead of the midterm elections are likely to decline. Yet, a clear signal to Russia is justified by the need for American leadership of the West in its confrontation with the Kremlin. Real leadership requires decisive action beyond electoral politics and painful economic reality.

With assistance from Julianna Rodrigues