The state of US energy policy

The Biden administration has sanctioned all Russian oil, gas and coal imports, an enormous decision that could send shockwaves across the global economy.

As energy makes up 50% of Russian annual export revenue, the White House feels that taking this step will help drain Putin’s war chest and disrupt his war effort as much as possible. Essentially, they have come to see sanctions as damage limitation tools rather than means to compel Putin to change his behaviour.

President Biden’s ban not only covers imports into the US, but it also bans American investing in Russian energy firms or in foreign firms that continue to produce energy in Russia. There will also likely be serious discussions in Congress regarding sanctions on Russian energy prospects. We could see Congress step in to go beyond the President and ban dollarized financing of Rosneft and Gazprom’s future offshore projects in hydrogen and liquified natural gas.

Policy Response

In response to price spikes (the highest in the US since 2008), the US committed to releasing 60 million barrels of oil from the US Strategic Petroleum Reserve. It released 30 million of them last week and is releasing another 30 million as a contribution to a 60-million-barrel International Energy Agency (IEA) commitment. This won’t do much in the long term - the US consumes about 20 million barrels-worth of oil per day - but it sent a positive signal to calm markets in the aftermath of the decision.

In addition, the Biden administration is also looking to re-establish diplomatic links with Venezuela and Iran, two would-be adversaries, with hopes of isolating Putin and getting more oil production onto the global market. The US sent diplomats to Venezuela to explore whether they can drive a wedge between the Maduro regime and Russia, one of its major allies. Venezuela holds the world’s largest set of oil reserves but has been under sanctions by the US since 2019 when the Trump admin broke off diplomatic relations. The White House has also been quietly trying to rekindle the 2015 Iran Nuclear Deal, in which the US would remove sanctions on global purchases of Iranian oil, flooding the market with a new source.

Global Impact

There are some concerns over whether the ban will hurt the Russian economy in the way the US desires. For one, the Russians can survive without selling to the US - it makes up less than 1% of annual Russian export revenues. Secondly, US sanctions could inadvertently help the Kremlin’s war chest – If Russian oil exports to fall by a smaller percentage than the subsequent spike in prices, then the Russians could end up making more money on less oil.

President Biden did make sure to show grace to EU allies, who did not follow suit with a ban. He made it clear in his speech that the US status as an energy powerhouse enabled it to act where others could not. His speech did not, however, acknowledge the UK’s decision to follow suit.

Domestic Impact

There are risks for the Democratic party in this ban. The White House doesn’t want to cause a further jump in energy prices at home but is under enormous pressure to be tough on Putin. They know that Republicans will attempt to weaponize both issues before the midterm elections. We saw some defensive posturing from Biden in his speech on Tuesday, in which he claimed that the federal government doesn’t have the power to compel the private sector to produce more oil.

It’s also clear that the Biden admin is not backing down on its commitment to green growth. The administration has repeated many times that a robust clean energy agenda is ultimately the only way to prevent authoritarians from using oil as a geopolitical weapon in the future.