Observations on Banning vs. Sanctioning Russian Crude Oil
By Benjamin Zycher
Amid the ongoing debate in the U.S. about the wisdom of banning the importation of Russian petroleum, roughly 5-10 percent of total U.S. petroleum imports (crude oil and refined products), it is perhaps unsurprising that some basic principles are being forgotten, unfortunately a ubiquitous characteristic of Beltway analyses. In particular: A U.S. ban on the importation of Russian petroleum would have little effect on global prices and Russian export earnings, while the imposition of sanctions on the financial flows created by Russian petroleum sales might yield impacts far more important.
Because the market for petroleum is global, a U.S. ban on importation of Russian crude oil would result in a reallocation of such deliveries among importers. The U.S. would import less (or no) Russian crude oil, which then would be sold to other markets not cooperating with the U.S. ban, perhaps with some price discounting and likely with some increase in transport costs. Russian crude oil ranges from API gravity (resistance to flow) 44.7 and sulfur content 0.16 percent to API 30.6 and sulfur content 1.48 percent. (Crude oil becomes more valuable as the API gravity increases and as the sulfur content decreases, essentially because such lighter and “sweeter” crude oils yield a more valuable mix of refinery outputs.)
The U.S. would import non-Russian crudes with properties similar to Russian crudes, a reallocation process obvious as a prospective outcome, in particular because there are available many crude oils on the world market with characteristics similar to the Russian crudes. Arabian Light, the global benchmark crude oil, is API 33.0 and sulfur content 1.77. The highest quality Russian crude oil, Sakhalin Blend (API 44.7, sulfur 0.16) is not all that different from two of the Nigerian crude oils; and the major Nigerian crude oil (Bonny Light) has characteristics (API 34.5, sulfur 0.14) not very different from the Siberian Light and Sokol Russian crudes.
And so only if some very substantial part of the world’s importers of Russian crude oil were actually to enforce a ban on such imports would important financial costs be inflicted upon the Russian economy. This in effect would represent a buyers “cartel” against the purchase of Russian crude oil, an outcome that would be difficult to enforce in that any given importer would have incentives to obtain Russian crude oil at a discount. This difficulty of enforcing collective action on a voluntary basis is why the 1973 Arab OPEC oil “embargo” directed at the U.S., the Netherlands, and a few others had no effect at all; the gasoline lines and market disruptions were caused by the price and allocation controls imposed by the Nixon administration. The same perverse outcomes obtained in 1979 despite the absence of any embargo that year.
It is not plausible that the economists in the Biden administration do not understand something so basic about the world oil market, although it is plausible that many prominent public officials calling for such a “ban” do not understand it. It is likely to be the case that Biden’s top advisors do understand it, but fear that an increase in gasoline prices caused by factors other than a ban on Russian crude oil nonetheless would be blamed on the ban, with the obvious political downsides to be borne by the administration even if such a ban were to receive substantial bipartisan support. This may explain why there now are numerous news reports that the Biden administration is pressuring Democrats in Congress not to support such a ban.
Sanctioning of the financial flows attendant upon sales of Russian crude oil anywhere — perhaps through a united exclusion of such transactions from the SWIFT financial coding and information system — would be likely to prove far more efficacious. Even a narrow demand from the U.S. government that U.S. banks not accept such financial flows — because U.S. banks are so heavily regulated, and because they must deal with regulators on myriad issues on a daily basis, it would prove difficult for them to refuse — would be likely to impose serious constraints on the necessary financial dimensions of Russian crude oil sales on the international market. An extension of such constraints imposed by the U.S. government to most transactions with foreign banks facilitating such Russian financial flows might prove even more effective, although certainly much more complex administratively.
The incoherence of the Biden administration energy policies — a combination of artificial constraints on domestic investments in resource expansion and transportation infrastructure combined with supplications to OPEC+ and other overseas producers for expanded output — is not helpful. That is why Cecilia Rouse, the chairman of the Council of Economic Advisers, found herself uttering this useless observation:
We are looking at options that we can take right now, if we were to cut the U.S. consumption of Russian energy, but what’s really most important is we — that we maintain a steady supply of global energy.
The central point here is that a U.S. “ban” on imports of Russian petroleum would have few real effects as distinct from symbolic ones; but a system of enforced sanctions on banks facilitating the financial flows that are the necessary adjunct of crude oil sales might prove effective, however cumbersome administratively. Because Russian oil production is about 11 percent of the global total, prices would rise sharply, by roughly 30 percent under reasonable assumptions about market conditions and the responses of other international producers. These are the economic realities that U.S. policymakers should keep in mind, but given the moral and national security imperatives attendant upon the Russian invasion of Ukraine, it is tragic that, yet again, U.S. policymakers are being driven toward useless actions largely as a result of perceived domestic political pressures.
