Today, Explained - Banning Russian oil

Episode Date: March 8, 2022

Gas prices hit a record high in the United States today. Then the White House put an embargo on Russian oil. The Atlantic's Robinson Meyer explains. This episode was produced by Hady Mawajdeh and Haleema Shah, fact-checked by Laura Bullard, engineered by Paul Mounsey, and edited by Matt Collette and Sean Rameswaram, who also hosted. Transcript at vox.com/todayexplained   Support Today, Explained by making a financial contribution to Vox! bit.ly/givepodcasts Learn more about your ad choices. Visit podcastchoices.com/adchoices

Today, I'm announcing the United States is targeting the main artery of Russia's economy. We're banning all imports of Russian oil and gas and energy. This war moves fast. It's not even two weeks old, yeah, but like it started then there were these sanctions, but not sanctions on Russian oil and natural gas. That would be bad for business, but there were all these other sanctions, and those were bad for business anyway. Gas prices surged, and then all of a sudden, maybe there should be sanctions on Russian oil and gas.

And then this morning, gas prices hit an all-time record high in the United States. Not if you take inflation into account, but the sticker shock is real. And now, the White House has announced it will ban all Russian gas and oil. On the show today, we're going to try and figure out where that leaves us. I'm Sean Ramos for him. It's Today Explained. Get groceries delivered across the GTA from Real Canadian Superstore with PC Express. Shop online for super prices and super savings. If you're looking at hurting Russia, they make most of their money through oil.

They make a ton of money through oil. So if you do an oil embargo, it's really going to hit them. Robinson Meyer, he writes about energy for the Atlantic, and even he didn't see gas prices shooting as high as they did as fast as they did. Yes, yes. And also, I think there was some feeling that we would feel gas prices quickly. But I think one thing that's happened is we felt the surge much faster than people expected. And it is a little related to the sanctions conversation,

in that part of what happened is just a bunch of Western oil firms over-complied with the sanctions and stopped buying Russian oil kind of before it was the policy. And so we've wound up at this place kind of faster than people expected, in part because the sanctions were such a big deal. And there was such like disgust with Russia and with doing business with Russia. And we saw that like rapid escalation from Western companies. That is like drove part of the environment where now this has even become something we can talk about. I asked Robinson to help us understand why Russia is fundamental to fueling the world. Okay, so Russia basically does three things that I'll list in order of importance. The first is it's just a giant oil producer.

It exports about 8 million barrels of oil a day. That is a lot. I believe it's the third biggest oil producer after Saudi Arabia and the U.S. And oil is a big global market. Everyone feels it when a big producer comes in or comes out. It's pretty fungible. It is like the base commodity, right? It's like the prime commodity in the world. It gets carted everywhere.

It's a the prime commodity in the world. It gets carted everywhere. It's a liquid fuel. The second thing is that Russia is a giant producer of natural gas, specifically to Europe, where it mostly heats European buildings and makes European factories run. And natural gas is less financially important to Russia. And the third thing it does is like Russia is a big mining producer. So it makes palladium and nickel.

And those minerals are really important for the energy transition. It's the least important of the three things that it does, but it is like a part of the energy system in that way too. And oil is number one. Russia needs it the most. The world needs it the most. A lot of countries depend on Russia. Oil is like a global market, but it is kind of the countries that are closest to Russia. And so it's the East Asian countries and Europe. And so when, you know, policymakers are talking about doing a ban on Russian oil. I will tell you today, our message

should be pretty clear and pretty simple. No more Russian energy should come into the United States for the duration of this bloody, horrifying and unprovoked war against Ukraine. The U.S. will ban Russian oil or the U.S. and some East Asian allies will ban Russian oil, but probably Europe won't for now. And that is for a variety of reasons, Like, it's just a lot easier for the U.S. to kind of stop using Russian oil. The United States is banning Russian oil, but considering the adversarial relationship most recent American leaders have had with Vladimir Putin, it might come as a surprise the United States even relies on Russian oil. Yes, it doesn't come in huge amounts, but it does come to the United States even relies on Russian oil? Yes, it doesn't come in huge amounts, but it does come to the United States. It's a lot smaller in the U.S., but I'd say the

U.S. has managed to import oil from a lot of countries with whom it doesn't have very good relations. And, you know, even with some countries with whom it's had worse relations than Russia, it's very likely that we increase oil production and increase oil imports from Venezuela, which we also have very severe sanctions on right now. And so there's a ton of deal-making that happens around oil. And that's part of the nature of the fuel, too, is because it's so fungible

and because you put it in a barrel and then the barrel can go somewhere, it's just fungible, and because like you put it in a barrel, and then the barrel can go somewhere, right? Like, it's just a lot harder to control the flow of oil. Going into this conflict, what are the sanctions placed on Russia as they relate to oil? So what's interesting is that basically the sanctions were designed by the Biden administration and the EU not to hit energy at all. And going to the conflict, what experts told me was that they're really going to try to avoid hitting energy. They're going to try to hit every part of the Russian economy except energy.

I would note that what the president is most focused on is ensuring we are continuing to take steps to deliver punishing economic consequences on Putin while taking all action necessary to limit the impact to prices at the gas pump. continuing to take steps to deliver punishing economic consequences on Putin, while taking all action necessary to limit the impact to prices at the gas pump. And why was that? That was to spare the world these surging prices? Yeah, it was because, first of all, oil prices have already gone up a lot. And this is a big political pain point for the Biden administration.

Of course, it's always painful when gas prices gas prices spike and so what happened is that once the sanctions were placed on russia and once the war started and i think once the world fully understood what a war would mean and to some degree like once the public in western countries and corporate leaders in western countries saw the war, they responded very strongly. And I think much more strongly than like experts trying to think through the situation beforehand expected. And we saw a bunch of Western oil companies not only pull out of Russia, you know, BP started this and it said, basically, we're going to dump our Russian assets. Like we're done in Russia and we're going to try to sell our assets in some fields. And we realize we're going to lose

hundreds of millions of dollars on this and it's fine. Like we're willing to just accept that because we don't think it makes sense to work in this country anymore. This is like overnight this is happening. Yeah, right in that first weekend of the war. And then on a mechanics level, even though the sanctions were designed

not to hit Russian energy exports, there were banks or trading houses that were like, we're so worried about reputational blowback, or just we're so worried about meeting the letter of the law here that we don't fully understand, we're just going to pull back. And very quickly, both the sanctions and the kind of organic response to the war in the West both hit energy exports much faster than people were expecting. And thus you see these surging prices. The national average now hovering just under $4 a gallon, the spike part of a global ripple effect stemming from war, with a price hike every single day since Russian forces invaded Ukraine,

up a total of 38 cents here in the U.S., expected to go even higher as energy giants turn their backs on Russian oil. Yeah, exactly. Exactly. Now, the surging prices are like, to some degree, there's always, you know, what's causing the surging prices? Well, the prices are going up. You know, it's like very hardging prices? Well, the prices are going up. You know, it's like very hard to talk about why markets do something. I think it's hard in this case to disentangle the fact that like oil prices were already increasing going into the conflict. And there's a bunch of reasons for that.

And we can talk about them. But basically, the world has reopened from the pandemic and is consuming a lot of oil because people are driving places and flying and goods are being shipped. And oil production has not come online as much as it was before the pandemic. And so that primed the pump, so to speak,

for these high oil prices. And then when the war hits and there there's geopolitical risk, and suddenly investors are nervous, and drivers are nervous, even if there was no hit to the Russian oil sector, we would have seen prices go up just because people start to get nervous, they want to hold on to oil. We're talking a lot here about markets and nerves. Is there a shortage, or are people just nervous that there might eventually be a shortage? I think people are just nervous that there might one day be a shortage.

You know, there is still a ton of oil in the country. It is not like the 1970s oil embargo from OPEC countries on the U.S., where there was not enough oil to go around. Good evening. For millions of Americans, this may be the worst weekend they've ever faced for finding gasoline to give them the automobile freedom

they take as their due. I've been in two gas lines already. This morning? This morning. How long did you wait for the first one? I've been in both lines over an hour, and I'm out of gas. So far, this is all just happening

in kind of people's projections and companies trying to hold on to oil. None of this has reached the level of a true shortage. But that didn't stop this from getting very political, at least in the United States. If we are not willing to stand up and take some hurt along the way and sacrifice along the way,

then I don't think we do credit to this incredible struggle. And I think the American people will rise to the occasion. If you look at Joe Biden's approval ratings, setting aside the one month where news was dominated by Afghanistan, there's a direct correlational relationship between how low gas prices are and his approval rating in the U.S. It is just like the important commodity for the U.S. And, you know, I cover climate change, oil. We've got to move away from it. But it's a very important fuel to the economy.

You know, it like, it is what powers most of the transportation sector in the U.S. We get chemicals from it. It is like a very important the transportation sector in the U.S. We get chemicals from it. It is like a very important part of the economy for now. And when it gets expensive, everyone fuels it in different ways. And so on Sunday, Secretary of State Blinken said, We are now in very active discussions with our European partners about banning the import of Russian oil. And it has been an idea that's gotten actually a lot of bipartisan support in Congress. So, you know, Nancy Pelosi.

I'm all for that. Ban it. Ban the oil coming from Russia. Yep. And Joe Manchin. Energy has become a weapon of war for Putin. He's using it against all of Europe, if you will. But Ukraine is basically the catalyst of what he's doing. And Marco Rubio. By the way, this notion that somehow banning Russian oil would raise prices on American consumers is an admission that this guy, that this killer, that this butcher, Vladimir Putin, has leverage over us. Why would we want that leverage to continue? And Lindsey Graham.

Every barrel of oil coming out of Russia has blood in it. So if you hit the oil and gas sector, that will further crush the ruble. And now President Biden, too. We're moving forward this ban, understanding that many of our European allies and partners may not be in a position to join us. The United States produces far more oil domestically than all the European countries combined. But the president was biding his time on this one. I think the Biden administration was very nervous about it because it really didn't want to send oil prices and specifically gasoline prices higher than they already are.

This has been a huge pain point for them. Oil companies in the U.S. were already complying, like over-complying with the sanctions and just not importing Russian oil. And so the White House may have decided, like, look, this has already started. Like, this genie's out of the bottle. And so we might as well get the benefit of this being a policy rather than just something that's happening.

The second is that, like, American voters are open to it. People really want to, how would I put it? People want to cancel Russia. People want to cancel Russia, exactly. They, like, are willing to pay. I mean, Joe Manchin said. If ever there's a poll being taken, he said, Joe, would you pay 10 cents more a gallon to support the people of Ukraine? And stop basically the support of Russia.

I would gladly pay 10 cents more a gallon. And at least with an embargo on Russian oil, like drivers will be able to understand more why it's happening. And it will kind of be something external to the United States rather than something that's happening here. And an embargo means prices go even higher. Yes, higher oil prices are coming

to every part of the world, basically, certainly for the next six months. What's to be done in a minute? Thank you. save time and put money back in your pocket. Ramp says they give finance teams unprecedented control and insight into company spend. With Ramp, you're able to issue cards to every employee with limits and restrictions and automate expense reporting so you can stop wasting time at the Thank you. issued by Sutton Bank, member FDIC, terms and conditions apply. taken care of with a sportsbook born in Vegas. That's a feeling you can only get with BetMGM. And no matter your team, your favorite player, or your style, there's something every NBA fan will love about BetMGM. Download the app today and discover why BetMGM is your basketball home for the season. Raise your game to the next level this year with BetMGM,

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with iGaming Ontario. Oh my God. It's $100 and it's not even a full tank. It really hurts the people that have to drive 20 and 30 miles every day to and from work. I think I'm going to start walking when it hits 6. I think I'm going to start walking when it hits six. I think I'm going to max out. We're back just to review no sanctions on Russian oil because that would be bad for gas prices. But then the whole thing is bad for gas prices anyway. So what

the heck? Let's place an embargo on Russian oil, which is surely just going to be even worse for gas prices. So let's talk solutions. Yeah. I asked Robinson what's to be done other than, you know, ending the war, which obviously. A bunch of things. I mean, so the first is that, of course, is that we could move away from fossil fuels, which we have to do anyway to fight climate change. It's a big goal of the Biden administration and many governments in Europe. And as far as oil prices and gasoline prices are concerned, that mostly means switching to electric vehicles and other forms of electrified transit and public transit. And the U.S. should invest a ton of money. Congress should pass some very aggressive climate policy.

That's what we need right now. We need to start planning. That being said, there's a few options the Biden administration has. The first, and I think the one that we're most likely to see first is that it's going to try to reach a new deal with Iran because Iran has a bunch of oil that it could be producing that it's going to try to reach a new deal with Iran. Because Iran has a bunch of oil that it could be producing that it's not producing right now. And it would love to get Iran back on the world oil market.

So they want to get more oil on the market even though there isn't necessarily a shortage at present. Yes. Yes. If you want to keep oil prices down, you have like two ways to do it. You can reduce demand, how much oil people burn, or you can increase supply. If you do a deal with Iran, you're going to increase supply. And that's going to help keep prices low. The kind of like last thing the U.S. could do to increase oil, to decrease oil prices,

which again is not reducing oil demand, is like the U.S. could produce more oil from the large geological reserves that it already has. But there's also always tapping into the strategic reserve, if I remember correctly. And the U.S. has already done twice now. So we keep, you know, the U.S. and other developed countries keep tens of millions of barrels of oil just sitting around in case something happens. Something like a war. Something like a war, yeah. Or one of the main reasons for it is so that basically if there was a big war and the U.S. participated, that the U.S. would have enough gasoline and fossil fuels to fund its military.

But it has also become used to kind of like stabilize the effect of geopolitics on global oil markets. And twice now, the U.S., in conjunction with other countries, has released oil from its strategic reserve, sold it on the open market, and that has briefly lowered prices kind of twice. The issue with that is it's just a one-time thing. You sell the oil, it goes out, it gets used, does not make a long-term effect on production. And to some degree, we're in this funny place because basically for 40 years,

the goal of U.S. energy policy was that we wouldn't be dependent on foreign oil, that we'd produce enough oil for us at home so that no matter what was happening in the world, the U.S. would be insulated from oil shocks. And of course, at this point, the U.S. is the largest oil and natural gas producer in the world. We have achieved, at least on paper, this energy independence we were looking for for 40 years. And what we found is that actually, oil is a big global market, prices are set internationally. Oil kind of can go anywhere in the world, a fat lot of good it's done for us. You know, like, we produce a ton of oil in the United States, and that has not done very much to keep oil prices down when there was trouble in the larger world. So a lot of politicians want U.S. oil companies

to drill more, to frack more. I think that's going to be hard, because fracking companies were producing too much oil during the 20-teens, and they lost a lot of money. And now they feel like they need to make a consistent profit for their shareholders, and so they're actually really happy for oil prices to go up and they're very reluctant to drill more.

And so the Biden administration is going to have to control their investors to actually accept lower profits. So it sounds like all of these solutions you're talking about, Robinson, would incrementally help eventually. But the overarching solution here to avoid crises like these would just be to become less reliant on oil, which of course has been, say, like President Biden's strategy from the jump. Although if you were paying attention to his State of the Union last week, it seemed to be much less of a priority than it used to be. Yeah, definitely.

And that is because a lot of the president's climate policies have just been frozen in Congress. You know, plans to incentivize Americans to buy more electric cars, to build out renewable electricity, to power those cars. Right now, that's just sitting in Congress and waiting for, you know, Senator Joe Manchin of West Virginia and Senator Kusinima of Arizona to find a way to support, perhaps. This is a no. frozen, it doesn't even know how to advance them, that weirdly, even though this is the main way to reduce our long-term dependence on oil to improve American energy security, it is like not something that's been on the agenda so much. It just feels a little bananas right now that the whole world is facing this energy crisis that we could solve. And yet, in the moment where we could

actually commit to solving it, so we're never in this situation again, the solution isn't like, why don't we do energy diversification? The solution is like, let's hit up Iran for way more oil. And it's so funny to compare it to like 2008, 2007, with the last time the gas prices were really, really high, when there was this huge push to move to lower carbon electricity and lower carbon energy because, frankly, it was the last year of George W. Bush's term, and so people were like, oh, we've got to do this environmental stuff. This Republican hasn't been doing it.

But because Biden's already in office and because he's already been trying to get this energy bill through, it feels like there's less of a push but like yes this is the thing like we if we moved away from fossil fuels then our exposure to any of these problems just as an economy would be lower and the crazy thing is like not only that but like what we've already found during the past year is like right oil prices were going up, going to the war. And that's because the U.S. economy was doing really well. We were adding a ton of jobs, but we were finding that there was a limit to how good

the U.S. economy could be without oil prices going up a lot. And if we decarbonize the economy, we would take some of that limit away. We'd get rid of some of those constraints. The U.S. economy could be doing even better. And so there's a ton of reasons to do it. But I think it's going to take way more of like a public push to turn this moment where oil prices are going to be really high into a moment where we actually successfully move away from oil and gas. Robinson Meyer, he writes about energy at The Atlantic. You can find his work at theatlantic.com.

Our program today was produced by Hadi Mawagdi, who just bought a house. Congratulations. Hadi had help from Halima Shah, who just bought a car. My condolences. I had help editing the show today from Matthew Collette, Paul Mounsey engineered, and Laura Bullard fact-checked with help from Amina Alsadi. This is Today Explained.