Ukraine’s Fight For Democracy Is Worth The Short-Term Spike In Energy Prices

Russia invaded Ukraine nearly 10 months ago, leading to 2,200 cases of environmental damage. That includes the loss of valuable forests and plant life and the deaths of 600 species of animals. At the same time, Russia has attacked 35% of Ukraine’s electricity infrastructure, causing its people to go days without power and heat.

Russia’s oil and natural gas sales have financed this aggression, providing it with $21 billion a month when oil prices hit their highest levels in June. But the West wants to choke off those profits by imposing price caps on Russian oil set at $60 per barrel. That will reduce its oil revenues to between $10 billion and $15 billion monthly.

There are serious questions about whether the price cap, which applies to seaborne oil and which went into effect on December 5, can disrupt President Putin’s war plans. Already, prices are falling because of less demand. And the caps don’t preclude Russia from finding alternative markets, such as China and India that are getting discounted oil. Russia, meanwhile, could limit production, driving up prices.

“The terrorist country continues its barbaric efforts to disable power supply and destroy infrastructure in Ukraine and uses scorched earth tactics causing colossal environmental damage,” says Tetyana Tymochko, an adviser to the Minister of Environment Protection and Natural Resources of Ukraine. “Ukraine is working on consolidating the international community in assessing the environmental damage caused by military actions.”

According to the analytics firm Kpler, Russia’s seaborne oil exports fell by 16% or a half-million barrels per day in the week following the price cap. Meanwhile, Russia’s central bank says that the sanctions, generally, could potentially upend the domestic economy. Despite this immediate response, the verdict is still out. The Russian benchmark price for oil is about $66.54, much less than the global oil benchmark at $78 a barrel. Countries such as Poland, Estonia, and Lithuania had wanted a price cap of $30 a barrel — a number that would gut-punch Russia.

But the allies can always lower the ceiling. The short-term goal is to avoid global disruptions in energy markets. Putin, however, says that the oil sector is already under-capitalized, calling the plan “ill-conceived and poorly thought-out.”

“For now, the price cap is not shaping up as a powerful tool to weaken the Russian economy. Perhaps in a different period, with looser market fundamentals and less concern about inflation, policymakers would have been more emboldened to pressure Russia. At the moment, energy security concerns are top of mind, and the G7 may have to play a longer game,” writes Ben Cahill, a senior fellow for energy security and climate change at the Center for Strategic and International Studies in Washington.

Which side has more chips?

Russia responds that it won’t sell oil to any country that refuses to pay the market price. But its European market share is falling, although China and India are increasing their purchases at a 30% discount. Still, those countries do not have the infrastructure to accept unbound limits on Russian oil. As to which side has the most bargaining power is another question. But longer term, Europe is lining up new suppliers and moving to greener technologies such as electric vehicles.

In 2020, Russia’s oil and gas revenues were $219 billion, according to Rosstat. And the two sectors combined made up 60% of its exports and 40% of its federal budget. It produced about 11.3 million barrels a day in January 2022. It’s about 9.8 million barrels as of September, says Statista. Russia’s energy giants, Gazprom, Lukoil, and Rosneft, might exist in a world with shrinking markets.

Can the price caps and sanctions be effective? They are making a political point, although Russia is still funding its war effort. Indeed, its production costs are $20 a barrel, while the price it trades globally is $70-$100.

But the price cap is just one aspect of the new sanctions and admittedly the weakest prong. The more potent weapon is the restrictions placed on the global maritime industry, which the European Union and the United States control. Expressly, those shippers are forbidden to carry Russian crude to countries that refuse to abide by the price ceiling. Monitoring such conditions is a different matter.

Russia, though, could curb production and drive up the cost of oil. That has the dual effect of hurting western economies and eroding their support for Ukraine. “Treasury officials are deeply concerned about a potential price spike—so a high price cap that does little to crimp Russian oil revenue may be acceptable,” says Cahill, with the Center for Strategic and International Studies.

Meantime, Ukraine is getting pummeled by Russian bombs. Moreover, Ukraine’s Environmental Inspectorate says that the land and water are getting polluted and destroyed, not to mention the country’s housing stock and power plants. The allies must continue to wean off Russian oil while they withstand the short-term price shocks to the energy economy. It’s a tough fight. But the democratic cause is worth it — and one for which Ukraine will continue to battle.