What Banning Russian Oil Really Means

Listen to this episode

S1: When I got Robinson Meyer on the phone, he reports about energy over the Atlantic. I wanted to talk to him about this thing. I’ve started noticing whenever I go, fill up my car with gas. Have you heard of these anti Biden gas pump stickers?

S2: I have with the. But he’s pointing at the number and being like, I did that.

S1: Yes, you can buy these stickers on Etsy. Amazon, usually they feature a goofy looking Joe Biden. People have been cementing them right next to the little meter that tallies up the cost of topping off your tank. Sometimes there’s more than one sticker plastered on a pump. A version with Kamala Harris saying I helped is available, too. Or you can get one of the Donald Trump promising to make affordable gas again. These stickers have been sighted all around the country.

Advertisement

S2: The funny thing is, I’ve actually seen a photo of them in the UK.

S1: Whoa. I mean, to me, I look at stickers like that, and I just think it’s going to be hard for this administration to unlock itself from high gas prices.

S2: Yes. Yes, that’s absolutely right. I remember paying a buck twenty five a buck fifty for gas, and now it’s like 420, and that’s a big leap, you know?

S1: Rob says the other thing about this price spike is that it’s not going anywhere, not anytime soon. So are we entering an oil crisis?

S2: We are entering a period of genuinely more scarce oil.

Advertisement
Advertisement
Advertisement

S1: But it’s different than the 70s, right? Like, it’s not a gas shortage. It’s a gas. I don’t know what would you call it.

Advertisement
Advertisement

S2: The honest answer is the structure of the global oil market is going to change because of Russia. It’s very volatile, like nobody knows what the global oil market might look like in a year.

S1: So what you’re saying is me the end consumer. I’m just going to get the not so great end of this stick. Yes.

S2: For the foreseeable future. Yeah.

S1: Today on the show, even if the war in Ukraine ended tomorrow, you would still be paying more at the pump. So how do we get here? And is anyone in Washington willing to make the political tradeoffs that could fix all this? I’m Mary Harris. You’re listening to what next? Stick around. I asked Robinson Meyer to start us off by explaining the way U.S. politics intersects with oil prices because I noticed a funny dance going on in D.C. when fighting first broke out in Ukraine. President Biden did not seem keen to restrict access to Russian oil, but as days became weeks. He did a full 180, announcing a total ban last week. It probably helps that there was bipartisan pressure here. Earlier this month, Republican Senator Lindsey Graham laughed as he acknowledged banning Russian oil. It’s one of the few things he could agree with Nancy Pelosi about.

Advertisement

S3: Nancy Pelosi is with us, which made me wonder What am I doing to Putin? Yeah, listen, you’ve done something but nobody else could do. And so I want to thank Joe and the whole squad up here.

S1: Were you surprised by this kind of camaraderie?

Advertisement
Advertisement
Advertisement

S2: I wasn’t. I wasn’t. You know, I think from a. From just a strategic standpoint, Russian oil imports are hugely important to, you know, Vladimir Putin’s regime. They’re hugely important, too, just like cash flow into Russia. And it is really Russian. Oil that makes up a huge percentage of their revenue. And so before the invasion, the thought was they’re not going to touch energy. You know, the U.S. is going to very carefully try to sanction Russia so that. We don’t touch energy imports.

Advertisement
Advertisement

S1: Biden doesn’t want gas prices to go up when he’s looking at a midterm election.

S2: Exactly, exactly. And the world is already a little bit caught in this inflationary regime like high energy prices are like the one way to like really, really generate some broad inflation because they just trickle through to everything, you know, like if it costs more to get something delivered, any good delivered on a truck rate that eventually comes through in the prices. So at first it was like, Oh, the West is going to touch Russian energy sanctions. And then in that first weekend after Russia invaded and it was clear that there was almost this like seemingly like a global moral revulsion at what had happened, and the sanctions went further than people intended. And then Europe really rushed to put on additional sanctions to change its policy even more. Once that happened, it does start to make sense that bipartisan lawmakers would look at trying to ban Russian oil imports and trying to, like, really hurt the Russian oil revenue machine.

Advertisement

S1: But at first, there was resistance from the White House to banning Russian oil

S2: when they first published the sanctions like a day or two after the invasion began and Treasury Department was actually publishing diagrams showing like Here’s how you can still buy oil like here’s how you can still buy energy like despite the sanctions we’ve like figured it out for you. Here’s how it’s going to work from Russia. From Russia, yes. And now Biden was calling Democratic leaders in Congress, asking him to please just like slow their roll on the Russian oil import ban because he didn’t want to seem like he was passing by Congress, he was going to do it anyway. Now part of what’s happened is that like in that in the 13 or 14 days since the invasion, there has been broad over compliance with the sanctions

Advertisement
Advertisement
Advertisement
Advertisement
Advertisement

S1: by over compliance. Robinson means that businesses actually got ahead of the Biden administration’s first round of sanctions. Initially, the president’s goal was to crack down on Russian exports except for oil and gas. But that’s not how it worked out.

S2: What has happened is that the sanctions are so harsh and also companies are so reluctant to be seen as facilitating the Russian invasion that a larger and larger chunk of Russian oil is just sitting there on purchased. Hmm. So even though, like oil traders are allowed to buy Russian oil, let’s say they’re not because they’re so worried about either, you know, breaking the law in a way they don’t realize because the sanctions are so, you know, just legally complicated or to being on the wrong side of kind of like Western public disgust that they are facilitating Putin’s regime. So like an example of this is Shell. The energy trading desk at Shell bought oil from Russia at a massive discount several days into the war, which

Advertisement

S1: seems like financially savvy,

S2: a very financially savvy mood. Now they can sell it, I mean, like brings more oil onto the global market. And yet a few days later, they apologize for doing it. They were like, We’re so sorry, we shouldn’t have done this. Well.

S1: I’ve never seen like a company be shamed like that.

S2: You exactly. Yes. Right. So I do think like Russian oil will find its way back to global markets. It just has to like they have to find an intermediary who can then sell oil. They got to find a guy. Yeah. They have to find a fence. Like, to some degree, like these things will find a way to the market. Like one of the reasons I think the White House has felt a little more comfortable with it, with imposing a Russian boycott is because even though it tried to design the sanctions such that Russia would still be able to sell oil on the global market. Russia hasn’t. It has had problems.

Advertisement
Advertisement
Advertisement
Advertisement

S1: So this is just formalizing something that’s already happened.

S2: Exactly. It’s reacting as if it can’t get Russian oil anyway. And by that point, it’s like, Well, we might as well impose a ban in the US because like, this is basically what’s happening, so we might as well do it as policy rather than like. Woops. Rather than like a kind of like, oh, sorry, we did this by accident.

S1: Can you explain the political calculus here with someone like Biden? Because you mentioned he was calling Congress something like, Hey, listen, like, give me a chance to get out in front here. How does he benefit from that?

S2: For Biden, I think there’s three different pressures on him. The first is he really does. The White House has been trying since last summer to keep oil prices and gas prices specifically as low as possible. They know that’s a major pain point for them, and they know it’s going to be a key step to constraining inflation, which, as they see it, is like the number one issue in the midterms.

Advertisement

S1: But this doesn’t seem to help with that.

S2: It doesn’t. So then there’s the second thing, which is he does want to look like he is being tough on Russia and that he’s doing as much as he can to stop the Ukrainian invasion and that he’s punishing Russia as much as possible. The third thing is that I haven’t seen like reporting to this effect necessarily, but I think you can see it in some of the White House comments. You know, if gas prices are going to be already pretty high and banning Russian oil imports is going to put them a little higher. But banning Russian oil imports will mean that you can blame Russia for the high gas prices. That might be a preferable situation for the White House.

Advertisement
Advertisement
Advertisement
Advertisement

S1: I think he called it Putin’s price hike in his press conference. I’m going

S3: to do everything I can to minimize Prudence price hike here at

S2: home exactly because it’s like if gas prices are going to be $4 a gallon and banning Russian oil, or at least the kind of Russian invasion is going to send gas prices to $5 a gallon. You’d rather just be able to like talk about how this is all Russia’s fault. And instead of the frame that we’ve been talking about gas prices through for the past 18 months or so, which is like thanks bye to the oil markets, really crazy. Thanks, Biden. Biden did that right now. It’s like we are asking Americans to sacrifice in this like global crackdown on Putin’s regime.

S1: I feel like this puts Republicans in an interesting position because they were angling to really make inflation and gas prices all that stuff into a big midterm issue. And they’ve already said. We support a Russian oil ban, or at least people like Lindsey Graham have said it. So does this somehow take away from their ability to use gas prices as a cudgel in the midterm campaigns?

S2: It may, and I think probably the Democrats are like hoping that it will certainly, and it will be something that people will be aware of. When you talk about gas prices, they’ll know that, well, Russia is just a big part of it. That being said, it is a bipartisan tradition to just attack the other party for high gas prices. And I think it does put I think it weakens that line a little bit, but I don’t know that we’re going to see Republican rhetoric really change. And I think from a political I hate to be such a pundit about this, but like from a political standpoint, I think the party, I think the Republicans will have no problem being like, we have to ban Russian oil. We have to crack down on Putin’s regime. Why isn’t Biden doing this? And also, why are gas prices so high

Advertisement
Advertisement
Advertisement
Advertisement

S1: as if those things are unconnected,

S2: as if those things are unconnected from a like journalist whose job it is to like, report on the truth? It is wrong to both say we need to ban Russian oil and then attack the administration that did that for high gas prices, right? It’s like they did the thing you wanted. You know, there’s there’s inherently a trade off there and you can’t really bash. It is not fair and produces a bad understanding of the world to attack the administration on both sides for it. That being said, all Republicans do it. Probably. I mean,

S1: why not both?

S2: Yeah, exactly.

S1: When we come back, America has been trying to make itself energy independent for years. Why hasn’t that protected prices at the pump? Looking at the way gas prices keep going up and the way the war in Ukraine seems to be propelling them even higher. I had this question why are gas prices in the U.S. being driven by what’s happening in Russia and Ukraine anyway? We only get a small amount of our oil from Russia. Less than 10 percent. Shouldn’t we be buffeted against this kind of global economic shock? But Rob, explain to me that’s just not how the oil market works.

S2: The way the global oil market works is that generally there is a single global swing producer. For the past 15 years, it’s been opaque, sometimes opaque, including Russia, sometimes not including Russia.

S1: OPEC is often described as a cartel.

S2: It is a cartel. It just literally is a cartel. It controls like 60 percent of the world’s oil exports, should we call it a mafia? That’s a little harsh, but it’s it’s just like if a cartel is something that’s able to set the global price because of what it like, it’s a cartel like it is straightforwardly described as a cartel and like the New York Times, you know. And in fact, oil producers want a cartel. In one of the interesting things when you look back at the history of oil, is that actually going back 100 years? There has always been a cartel. There’s almost always been a cartel in oil. You know, so it was standard oil and then it was actually the Texas Railroad Commission after that. And then it was OPEC.

Advertisement
Advertisement
Advertisement

S1: And is it a cartel? Basically, because this product is so valuable and so essential because there’s not like a cartel on peanut butter?

S2: That’s right. I think what makes oil different is that it is actually very abundant. There’s a lot of oil in the world. It’s like this weird thing where it’s very profitable to sell, but it costs a lot of money to get it out of the ground. And it’s very possible to be caught in a situation where, like you invest a couple of million dollars to get oil out of the ground and then suddenly the oil price collapses. And now your your investments ruined.

S1: So it’s kind of like a union guy. People with a lot of fear, a lot of oil.

S2: Yeah, no. It is like almost a union. And one thing that people will tell you is that actually since 2008, we haven’t had an effective cartel in the oil price internationally like OPEC hasn’t been as effective as it was from the 1970s to 2008. And what that’s meant is that we have all this volatility. There’s these big boom and bust cycles, right? Like oil can get down to 150 and then it can go up to $5 a gallon. What I think is important to understand here is that basically the way that you control the global oil price is through swing production

S1: with swing production.

S2: Saudi Arabia and the UAE specifically sit on such bountiful reserves of oil that they can basically increase their production within six months. If they see the oil price getting high, they can turn on their taps a little bit more and supply more oil to the market. They have a faucet. They have a faucet. Exactly.

Advertisement
Advertisement
Advertisement

S1: So why aren’t they opening the taps now?

S2: That is a great question. Over the past 10 years, frackers came in. The U.S. went from being a relatively marginal oil supplier to being literally the biggest producer of oil. Globally. And what happened during that time is that three times in the past seven years, frackers like us domestic really has got really excited. They were like, Oh man, oil prices high. We’re going to invest a ton of money and like, build a ton of fracking rigs and pump a lot of oil and make a lot of money. And they got so excited that they completely oversupplied the global market and the oil price crashed.

S1: So is the cartel looking over at the U.S. like, y’all are ruining our business?

S2: They have. And so during the pandemic, that cycle happened like catastrophically for the domestic oil industry and what used to be this industry of like hundreds of firms has kind of been whittled down to a couple dozen firms. And those couple of dozen firms have Wall Street investors, and those investors are like, You’re not going to do this again, you’re not going to ruin our investment again for a fourth time. And so what we’re going to ask you to do is no matter how high the oil price gets dumped, you’ll more oil just steadily increased oil production, but don’t do a big bonanza of drilling. And so suddenly, unlike in a situation in the 2010s where like everyone was pumping a bunch every time there was a general rise in the cost of oil. Now, oil supply is like very unresponsive to price.

S1: That seems like a busted marketplace to me if we have something that’s essential. For the country, even if it’s toxic

Advertisement
Advertisement
Advertisement

S2: and contributes to climate change and everything.

S1: Yes, unresponsive to the marketplace,

S2: I think it is a busted market. And I think one thing that we’ve seen, especially during the first year of the Bush administration, is that OPEC has been very reluctant to drill more because they’re like, look at the price crashes every time. We don’t want to drill more, we want a stable, stable oil supply. And the frackers are like, we’re not going to drill more. We need to return profit to our investors. The oil market is always very boom bust, but it has become exceedingly boom bust right now,

S1: with the global oil supply constrained in this way. A sudden drop in the oil available for purchase has a massive ripple effect. Commodity traders who buy and sell oil, they want to buy up as much as they can, and that drives the price up for everyone. Even if the U.S. has plenty of its own oil that it can drill out of the ground.

S2: All of our oil is priced in the global market. And basically, what the price is in the U.S. kind of obeys that global price. And so even though Russian imports are a relatively small part of U.S. oil imports, Russia does supply like something like 10 million barrels a day to the global market. And that’s a lot of oil. I think there’s another reason which is just like, frankly, the oil market did crazy things in the two weeks after the invasion because people just didn’t know what was going to happen. Traders are very nervous. They’re just not sure what’s going to happen. The people who buy oil for refineries, the people who like turn oil into gasoline and people who buy oil just because like they’re trying to arbitrage the price and like, make a quick buck off speculating on the oil price, it makes them very nervous. They want to hold on to oil. It does kind of cry out for like, much more aggressive U.S. government involvement.

Advertisement
Advertisement
Advertisement

S1: How could the U.S. government get involved to compel either oil drilling or changes to the price of oil?

S2: There’s a proposal floating around from the think tank Play America to center left. It’s like, look, the economy is booming kind of right now, except for oil prices and oil prices are driving inflation in the rest of the economy. And so we actually need to like stabilize oil prices in order to save the rest of the economy and keep, you know, avoid a oil driven recession. And so the way to do that is first, the U.S. can buy and sell oil through the Strategic Petroleum Reserve, which is literally a giant set of underground caverns near the Gulf Coast, where the U.S. keeps a ton of unrefined crude oil.

S1: We’re already doing that right.

S2: We’re already doing that. And so the US could say, Look, we’re going to sell oil out of the Strategic Petroleum Reserve right now, which the US has been doing, but it like. Whenever we just like sell oil on the market from the reserve, it’s like very meek. It doesn’t really work very well. It’s just like a single boost, you know,

S1: so we need to go hard or go home.

S2: We need to go hard in a way that sustainably increases production. And the way to do that would be to sell oil from the SPR now and then say in a year, we’re going to buy back oil into the Strategic Petroleum Reserve, but we’re only going to buy back oil from new domestic wells. So if you have a new domestic, well, we’re going to buy it from you a year from now at a price that basically ensures you’ll make money. The second thing the US could do is just offer their various ways it could do this. It can offer financing to the companies so they don’t have to listen to Wall Street as much. And it’s like they’re leaving free money on the table if they don’t take it. And the third thing is, right now, one thing that is holding back domestic drilling is frackers would actually like to drill a little bit more now than they are, but they don’t have the raw materials to do it. So you need a lot of sand, you need steel pipe to put in the ground. And the U.S. could use the Defense Production Act, which it used for Covid tests and vaccines to basically supply sand and steel pipe and other kind of like key inputs to the frackers at like a reasonable price such that they would then produce. That’s the way the U.S. could like kind of force oil prices down right now and actually use the fact that it has these domestic oil reserves in an intentional way.

Advertisement
Advertisement
Advertisement

S1: I see some tradeoffs here, which is you would be funding the oil companies when you’re trying to move towards decarbonization. But I don’t know, maybe you have to to get there.

S2: I think this is the biggest. This is the trade off with the Biden administration, and I think it is one that people are just very uncertain about how to make, which is in the short term. Oil and gas demand is really inelastic. You know, we just

S1: we need it,

S2: we need it. And in the medium term, we need to be cutting oil demand from the economy and decarbonising and moving to low carbon fuels and electric vehicles and electric trucks as fast as we can. Yeah, I mean, here’s the crazy thing, right? Like for the past 50 years, U.S. energy policy has been to make us independent, to make us energy independent, and we’re going to wean ourselves off foreign oil. We are, on paper, energy independent.

S1: I sense there’s a but coming.

S2: Yes, we pursued a policy of domestic drilling specifically to insulate the US economy from the vagaries of geopolitical crisis and for such a event as a major oil producer just dropping off the map very quickly. And what we found is that that crisis has arrived and gas prices are nearly a $5 a gallon. It didn’t work and it didn’t work because the U.S. treated the oil industry in what in a global context is like, frankly crazy, which is we just allow the global price of oil to, like, control everything about this precious national resource. We need like low oil prices now, but then we need to move away from fossil fuels as quickly as possible and help the world move away from them so that like we reduce the power of petrol crats like Prudence to make war and to, like make money through these hard extraction.

Advertisement
Advertisement
Advertisement

S1: So is there a chance that this price shock is a good thing like it gets everyone’s attention, reveals a fundamental flaw in our approach to energy regulation? And maybe it even drives us to decarbonise faster.

S2: I think it’s almost. Inevitable that this price shock will accelerate decarbonisation. I think just when people see these prices, they’re like, you know, one of the funny things about this crisis that Russia also is a major supplier of nickel and all these metals that we need for the transition. And so because

S1: they go into batteries for electric cars,

S2: they go into batteries or like, we just need a lot of metals for the transition. And Russia is a major supplier and actually some renewable prices are going to go up. And right now, actually EV production capacity is like tapped out. And so it’s not like people can go to the dealer and buy a new EV as easily as they might’ve been able to a few years ago. That said, I don’t think people are going to buy a gas car like happily. You know, in the next year, I don’t think people are going to be happy about just like shelling out for a gas guzzler because of that, I think it’s almost inevitable that this accelerates the transition.

S1: Rob Meyer, thank you so much for explaining all

S2: this to me. Absolutely. Thank you so much.

S1: Robinson Meyer is a staff writer over The Atlantic. He is the author of the newsletter The Weekly Planet and a co-founder of the Covid tracking project. And that’s our show. What next is produced by Carmel Delshad Mary Wilson and Elaina Schwartz. We are getting a ton of help from Anna Rubanova and Laura Spencer, and we are led by Alicia Montgomery, a Mary Harris. Thank you for listening. I will catch you back here tomorrow.