Allison Bailey/NurPhoto via AP
Supporters of Ukraine rally near the White House, March 5, 2022.
A U.S. ban on Russian oil and gas has been inevitable for several days, with the Biden administration bowing to reality on Tuesday. Polling shows overwhelming support for the move, even after an explanation that it would lead to higher gasoline prices. Congress was about to cobble together a veto-proof majority. With a surge of domestic support for Ukraine, it wasn’t tenable to continue what could credibly be described as paying for Putin’s bombing of defenseless civilians.
It’s easier for the U.S., where about 7 percent of total energy imports come from Russia, to make this decision than in Europe, where the number is more like 40 percent and where countries have rejected any talk of a ban. And the ban has already been effectively instituted in practice if not in law, as global shippers, oil companies, traders, and other key parts of the oil sector have shunned Russia.
Any relative increase in oil rates from this announcement will likely be muted, as traders priced in the ban based on the discussions over the past few days. But with oil already run up to close to $130 a barrel, the news certainly won’t relieve the price pressure. Hoarding will only boost the speculative price.
Serious economic troubles are ahead, and all this chaos will undoubtedly slow the green-energy transition. However, Putin’s war of aggression may have finally broken through the political obstacles to ending humanity’s dependence on fossil fuels.
The immediate future is going to be painful. Historically, a sustained price shock of this type leads almost axiomatically to a recession. Oil remains an important consumer need that also factors into the cost of transporting most other goods, and a component part of still more. Tragically, we have not advanced the green transition anywhere in the world to the degree that we can escape the consequences of oil shocks. I imagine Americans who say they’re willing to suffer the consequences of an oil-induced recession will be the same ones pointing the finger at politicians when that recession comes.
Unfortunately, it’s hard to see in the mess of bad choices a way for the economic pain to be avoided. The rogues’ gallery tour to Saudi Arabia and Venezuela is unlikely to bear much fruit: The Saudis are wedded to Russia within OPEC, and Venezuela’s oil sector desperately needs investment to raise output beyond a trickle, and it would take years. Unfortunately, the chief negotiator for the Iran nuclear deal left Vienna abruptly, suggesting that the best hope to replace Russian oil supplies was in peril. Russia has sought guarantees that sanctions on them would not impact future trade with Iran, and this has obviously spooked the Iranians to some degree.
Meanwhile, the oft-professed idea that America can drill its way clear of dependence on foreign oil is absurd. Oil trades in a global market: Regardless of energy abundance at home, a loss of supply anywhere in the world will affect prices. Strategic Petroleum Reserve releases, despite 30 million barrels moved last week, are not enough to make a dent. And while Republicans contend that the Biden administration is holding back fossil fuel production, that’s just not the case.
The only viable long-term solution is to finally act swiftly on a green transition as a national-security imperative.
As the Prospect wrote last month, Wall Street investors have no interest on returning to the debt-heavy, profit-light market for U.S. shale, preferring limited production, high prices, and dividends back to shareholders. The Financial Times headline “Oil Industry Pleads With Wall Street to Stop Holding Back Investment” offers a good sense of the dynamic. Even if investors could be persuaded to not crash shale stocks if drilling commences, the long-stalled investment will take some time to yield more oil. When the CEOs of every top oil company tell you volatility is here to stay, believe them.
The only short-term solution in this environment is to end the war. This is easier said than done, especially as seemingly no U.S. official appears to be even thinking along those lines. It also may not bring Russian energy supplies back to global markets. The rupture may be irreparable, as businesses and nations could easily decide it isn’t worth funding the coffers of an aggressive imperialist with a tendency to get himself landed under a strangling sanctions regime.
The only viable long-term solution is to finally act swiftly on a green transition as a national-security imperative. The problem is that it happens to be the worst possible time to make that happen.
The EU, where inflation has spiked, is talking about reducing its reliance on Russian energy by two-thirds within a year; a heat pump in every pot, so to speak. But it seems aspirational, and it will be difficult to herd 27 independent nations with varying resources and opinions. Unwinding the unwise bet it made on Russian natural gas isn’t going to be easy, though the option this week for massive joint infrastructure bond sales for energy and defense is intriguing.
Meanwhile, we’re experiencing not just an oil shock but a broad commodity shock, with Russia a leading provider of many of the mined materials needed for electrification and green production. Take, for example, the market in nickel, which surged to its highest level since 2007 this week and doubled within a day, triggering a suspension of trading. Russia accounts for around 17 percent of “high-purity nickel production,” most of that from one mine in Siberia. While exports haven’t halted, reluctance to trade Russian commodities have sent the market haywire.
Nickel happens to be an important element in the production of electric-vehicle batteries. Moreover, as Joe Weisenthal explained on Tuesday, it’s not just nickel but a series of precious metals where the price is spiking. In addition, there just isn’t a lot of inventory for these key components of EV production. There’s a cap on how much you can produce right now, due to both price and physical amounts available.
This is going to be a rough stretch. The time for a free lunch, or at least a cheaper one, on clean energy has passed. But the direction toward a more sustainable future, though brought along through a punishing and catastrophic war, is finally pointed correctly. “Transforming our economy … powered by clean energy will mean that in the future no one has to worry about gas prices,” President Biden said in prepared remarks today. “It will make America the world leader in manufacturing and exporting clean energy technologies of the future to countries all around the world. This is the goal we should be racing toward.”
Maybe a climate hawk is just a gas-guzzling car owner who’s been mugged by reality. The only way this disaster in Ukraine can succeed over the long term is by cutting down the false choices and recognizing the imperative of a clean-energy future.
One final note. The conceit behind “drill baby drill” on the right and green transition on the left is similar: that domestic abundance and self-sufficiency frees us from being beholden to tyrants. Doesn’t that logic also hold for domestic manufacturing outside the energy space? Just as the situation in Ukraine forced a rethink about critical domestic production in energy, shouldn’t the pandemic and its supply chain snarls force the same rethink about critical domestic production in everything else?
