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Even now, on the fifth day of the Russian invasion of Ukraine and Kyiv bracing for the worst, the West has continued purchasing the oil and gas that Moscow is desperate to sell — pocketing hundreds of millions of dollars daily to subsidize its war machine.
Washington and Brussels have carved out loopholes big enough for an oil tanker in their current sanctions policy, allowing the trade to continue. Western officials have also worked the phones, reassuring traders — and their banks — they can continue buying — and paying for — Russian oil and gas.
But Kyiv is pleading for it to stop. “We insist on a full embargo for Russian oil and gas,” Ukrainian Foreign Affairs Minister Dmytro Kuleba tweeted over the weekend. “Buying them now means paying for the murder of Ukrainian men, women and children.”
As with every other action that only a few days ago seemed unpalatable and unlikely — targeting the Nord Stream 2 pipeline and SWIFT foreign-currency system, or supplying offensive armament — the oil weapon is looming as an economic punishment that could provoke a dangerous military response.
Russia exports about 8 million barrels a day of crude, refined petroleum products and other oil liquids, a significant chunk of global demand of about 100 million barrels a day. About two-thirds of the Russian supply goes to industrialized nations in Europe, North America and Asia.
Germany is worried Europe won’t have enough gas to make it until the spring, and blackouts may follow. The U.S. fears oil prices will jump to $150 or even $200 a barrel, just ahead of its midterm elections. In Washington and Berlin, the message is almost unanimous: Sanctioning Russian oil and gas will hurt the West more than Moscow, and it’s unlikely to deter Vladimir Putin. For now, it won’t happen. John Arnold, a famed former commodity trader, summarized that school of thought: “As much as the world is mad at Putin, that is not a price the West is willing to pay.”
Others appear open to the idea, however. U.K. Foreign Secretary Liz Truss over the weekend floated the prospect of setting caps on purchases of Russian oil, progressively reducing them. Ironically, that sounds exactly like the 1973 Arab oil embargo, which set a 5% monthly output reduction. Other Western officials are asking, if not now, when?
I can’t see the status quo of the energy trade lasting forever. Unless the Ukrainian-Russian talks yield some quick results, the gruesome photographs and videos that will inevitably follow a Russian push into the biggest Ukrainian cities, including Kyiv, will harden Western public opinion. If the war drags on, it’s a matter of when, rather than if, the energy trade gets sanctioned. Already some European refiners have stopped buying Russian crude, self-sanctioning Russian oil. Even with the White House encouraging oil traders to keep going, moving Russian petroleum, particularly seaborne flows, is increasingly difficult.
Canada on Monday became the first G7 nation to brandish the oil weapon. Prime Minister Justin Trudeau announced his country won’t import more Russian crude, a largely symbolic step as Canada imports just a trickle of Russian oil. But as Trudeau said, “this measure sends a powerful message.”
Oil traders described it to me this way: Nothing official is blocking the energy trade, but there’s a lot of sand in the gears. The system is at risk of seizing up at any time, they add.
In a sign of how reluctant the market is to buy Russian oil, its flagship Urals crude is selling at a record discount to the benchmark Brent. On Friday, it sold for minus $11.50 a barrel. The gap is likely to be much larger on Monday. For sure, China and India may buy more, but they can’t replace European demand. If that dries up, Russian crude will start to back up at ports. With limited domestic storage, and without the option of turning tankers into floating storage units, Russian producers will be forced to shut down wells, potentially damaging them for good.
Western countries have contingency measures. Washington, in talks with European nations and the International Energy Agency, has drafted a plan to release between 60 and 75 million barrels from the West strategic petroleum reserves as soon as this week, if needed. An emergency IEA ministerial meeting was for called for Tuesday to authorize the release and explore further measures.
For now, OPEC+ doesn’t see the need to deviate from its plan to boost monthly output by 400,000 barrels a day. But in the event of an actual disruption, Saudi Arabia and the United Arab Emirates may feel compelled to use their spare capacity.
A lot more would be needed, even if only half of the Russian oil gets hit by either official sanctions or corporate decisions. In theory, the IEA emergency reserves should be able to absorb even a 5 million-barrel a day disruption for a few months. But the West would be fighting an open-ended disruption with a finite stock. The market would anticipate that sooner or later the reserves would be exhausted, and oil prices would soar.
Ultimately, though, the biggest risk of deploying the oil and gas weapon, is military rather than economic. The Kremlin could consider it a casus belli. At current prices, Russia earns north of $1 billion a day exporting its oil and gas, and cutting that equals the economic decapitation of the regime. Putin has already raised nuclear alert levels. Put oil and gas on the table, and he’s likely to up the ante.
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