by Philip Pilkington
Wednesday, 9
March 2022
Analysis
14:23

Oil and gas sanctions hurt the West more than Russia

A rise in price benefits the producer, not the consumer
by Philip Pilkington
Russian President Vladimir Putin (R) and Gazprom CEO Alexei Miller (L). Credit: Getty

For the past few days, I have been viewing some of the sanctions taken against Russia with scepticism. Many seem to hurt Russia in the short-term but weaken us in the long-term. Not so with the recent oil and gas embargoes announced against Russia by the United States and the United Kingdom. These policies seem designed to strengthen the Russian economy and weaken our own in both the short-term and the long-term.

Oil and gas are what economists call ‘fungible goods’. Global markets consume these types of goods without discrimination as to where they come from. The only thing that matters is the price of a fungible good. If we ban Russian oil and gas, it will be bought by another country — perhaps at a very slightly lower price relative to oil and gas from other countries.

What the oil and gas embargoes do is make global markets more skittish by driving up prices. We are already seeing oil and gas prices rise, partly due to the inflation generated by the Covid-19 lockdown policies and partly due to the conflict in Eastern Europe. The embargoes are adding fuel to the fire.

Here’s the thing though: higher oil and gas prices benefit oil and gas producers at the cost of consumers. Russia is, as everyone knows, an oil and gas producer. In the West, we are consumers. Driving up oil and gas prices, as seems to be official policy right now, benefits Russia and harms us. Why are our politicians doing this?

For Western consumers, our energy bills are going to rise. We have already seen this happen. But expect it to get worse — potentially a lot worse. The buzz in the markets is that oil price could rise from their present price of $127 a barrel to anywhere between $150 and $180. These price rises will then pass through to the price of everything else from food to clothing to international travel. You get poorer.

The politicians tell you that you take this hit to make the Russians suffer. But that is simply not true. In fact, they get richer by selling this more expensive oil and gas on the global energy markets.

I ran some estimates of what this would look like. The findings were remarkable. If oil prices rise to between $150 and $180 a barrel, the Russian trade balance will increase to 20-25% of GDP. In practice, this means that every year, for every four roubles in the Russian economy, Russia will be accumulating debts from the rest of the world of one rouble. Russia will be building a massive portfolio of international debt and thus vastly strengthening their economic and diplomatic power.

You pay for this. As prices rise, the money comes out of your pocket and more of it goes into the global energy markets. These sanctions are an incredibly self-destructive policies, and we must stop our politicians from pursuing them.

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Fred Sculthorp
Fred Sculthorp
3 months ago

Absolutely fascinating. If Russia are in it for the long game – and this suggest they are – then how will western democracies sell the war and the sanctions to the public? Sexy women with guns and Zelensky’s iphone monologues will surely only last a month. Then what?

Lennon Ó Náraigh
Lennon Ó Náraigh
3 months ago

I’m more worried about an economic war involving grain and fertilizer. Ukraine and Russia are breadbaskets. It’s in nobody’s interest for the grain in those countries to build up in silos for the rats to dine on.

Brendan O'Leary
Brendan O'Leary
3 months ago

I agree with much of this.
You ask: Why are our politicians doing this?
I guess because they want to seem to be doing something but don’t want to use military force. Which is probably what Putin calculated on

J Bryant
J Bryant
3 months ago

Interesting article and its central argument makes sense if Russia can sell its oil and gas to countries that aren’t boycotting it. But is that a given? For example, how do you transport large quantities of natural gas to, say, China? So far as I know there isn’t a major gas pipeline between Russia and China.
Also, Russia’s access to the global financial system is now heavily restricted. How will buyers pay for the oil and gas in a way that is accessible to Russian banks and businesses?
I do strongly suspect these sanctions will drive a movement away from US dollar-denominated banking to alternative systems such as the Chinese equivalent of SWIFT or even crypto currencies.

Brendan O'Leary
Brendan O'Leary
3 months ago
Reply to  J Bryant

There is indeed a pipeline flowing Russian gas to China, new ones planned (agreement signed last month, see link below), and LNG terminals.
https://www.reuters.com/world/asia-pacific/exclusive-russia-china-agree-30-year-gas-deal-using-new-pipeline-source-2022-02-04/

Kiat Huang
Kiat Huang
3 months ago

And what if Europe, USA et al declines to purchase Russian oil and gas? For one, Russia does not get our currency payments for it. They will have to sell their fungibles elsewhere.

Yes, the process of oil and gas will go up in the short term – this will cost consumers, but – and this seems to not cross economists minds – the public may be willing to put up with it.

If the West had never decided to use Rotarian oil and gas on the first place but to get them from other suppliers, what would reasonable estimates of the prices now? I ask this because each can be considered the underlying value which the price will correct to.

The decision to withdraw from doing business with Russia, to not spend money on its products, will cause an economic cost in the short term, but energy security, morality and belief in our own democratic values make that a winner in the long term.

Iris C
Iris C
3 months ago
Reply to  Kiat Huang

The well-off can “put up with it” but what about those on minimum incomes?

Kiat Huang
Kiat Huang
3 months ago
Reply to  Iris C

Prices go up for all kinds of reasons and stuff can become scrarce. We have been so used to plentiful, “cheap” and safe that it means we are paralysed with fear when an agressor manipulates us not to step in to help a friend militarily, by threatening us with nuclear war.

Last edited 3 months ago by Kiat Huang
Philip Stott
Philip Stott
3 months ago

With respect, oil and gas are not completely fungible. Their physical location affect the price.

Snapper AG
Snapper AG
3 months ago

Russia’s big problem is that even if they can sell the oil, what are they going to buy with the money? They’re being cut off from imports from the entire Western world. Trading away oil for dollars is pointless unless you can buy something with the dollars.

Matthew Powell
Matthew Powell
3 months ago
Reply to  Snapper AG

Some western companies are still trading in Russia as is the majority of the rest world. Some goods will also get round sanctions through third parties, as no secondary sanctions have been announced yet. The main impact is the sanctions on western technology, which can’t be sourced elsewhere and the fall in the value of the Ruble but Russia is not under a global blockade, it can still trade.

Ian Stewart
Ian Stewart
3 months ago

This makes no mention of the fact that finance providers and logistics are required to deliver the oil – and these companies will wish to avoid sanctions too.

wole Odets
wole Odets
1 month ago

The sanctions make no sense. They won’t stop the war and they won’t unseat Putin. Iran has been under sanctions for decades, as has Cuba and North Korea, their regimes are as firmly entrenched as ever.

The problem with a west whose populations have taken consumerism for granted for generations since the second world war is they don’t understand how any other society can do without the creature comforts and material privileges people in the west have come to regard as bare essentials.

They can. Sanctions by powerful countries against economically weaker ones are essentially economic warfare. The besieged in any war rally round the flag and wear privations driven by sanctions as a badge of honour.

If Britons endured months of carpet bombing from the Luftwaffe, why do we think Russians will fold because the US has withdrawn the Big Mac from Moscow.

The sanctions apart from hurting those who have imposed them, have played into the Kremlin’s hands as sanctions always strengthen regimes they are meant to undermine. Governments fall when economies fail due to due to domestic policies or a lack of them, rarely when economic collapse can be blamed on foriegn pressure or in this case outright economic warfare by foreign nations who have always been Russia’s adversaries. The last time a western nation attacked Russia they lost 20 million souls. Every Russian child learns that from pre-school. Why do we think they wont see the current economic assault by the most powerful nation in the west, the way their grandparents saw the millitary assault by its predecessor.

There is a risk for Vladimir Putin – but only if he loses the military, not the economic war. The Kremlin won’t survive defeat on the battlefield, They will actually thrive if they suffer on the economic front.

David Uzzaman
David Uzzaman
3 months ago

You can’t isolate economics from politics. If the West is unable to directly oppose Russia because of the risk of escalation into nuclear war sanctions are our only option. Yes it’s going to be extremely costly but the cost is spread over many countries who combined have larger populations and economies than Russia. Given the poor performance of the Russian Army in Ukraine a conventional war to push them out would be significantly preferable but it’s not an option. Doing nothing is also not an option.

Last edited 3 months ago by David Uzzaman