Commentary on Political Economy

Tuesday, 8 March 2022

 

The West can survive a blockade of Russian oil and gas

A Western oil embargo against Russia raises the geostrategic stakes exponentially. What was almost unthinkable last week has become unstoppable this week.

Ambrose Evans-Pritchard

A Western oil embargo against Russia raises the geostrategic stakes exponentially. What was almost unthinkable last week has become unstoppable this week. Ukrainian resistance and outraged moral opinion in the democracies has changed the character of this war, and changed what the West is prepared to do.

The White House is imposing a total halt to oil, gas, and coal sales from Russia. It is sending emergency missions to Saudi Arabia and Venezuela to find enough extra barrels of crude. It is pushing for a quick deal with Tehran on nuclear proliferation to bring back Iranian crude. You can hear the growls of the world’s slumbering superpower provoked into righteous wrath.

A woman walks past an apartment building hit by shelling in Kharkiv. AP

Europe is digging in its heels. It is offering only to phase out Russian fossil fuels by 2030, which is tantamount to saying business will go on as usual even as Vladimir Putin levels one Ukrainian city after another. This position is morally and politically untenable.

Poland and the front-line states are pushing hard within Europe for maximalist measures. If all three of NATO’s Anglo-Saxon powers take a lead, the momentum is likely to become irresistible. My presumption is that the EU will be swept along by events and US pressure, just as it was a week ago when it was still trying to veto Russia’s expulsion from Swift.

The West has the strategic depth to endure the sudden loss of all crude oil sold to Europe and to the NATO democracies, roughly 5 million barrels a day, though more if you include refined products. It will be painful but is technically and economically doable.

The Kremlin is threatening to cut off Europe’s gas for good measure. But this weapon has lost its potency after weeks of mild weather and copious deliveries of US liquefied natural gas. European gas storage was indeed dangerously low in January after months of manipulated flows from Gazprom. Today it is back within its historical range.

We have an odd situation where both sides are threatening to inflict energy damage on the other, but the threats are not equivalent. A crude blockade will make it impossible for Putin to continue waging serious offensive war in Ukraine beyond a few weeks. Oil and gas make up 40 per cent of Russia’s state budget. It is what holds the patronage machine together.

Embargo could test regime to destruction

There is a reasonable chance that an embargo will set off the internal disintegration of Vladimir Putin’s siloviki regime (KGB mafia), though on what timetable remains obscure. Will Russia’s patriotic generals agree to devastate the Varangian cradle of Kievan Mother Rus with cluster bombs? I doubt it.

The US oil ban roiled Wall St but not the oil price which did not test its $US130 high this week.  Odessa American

Professor Alan Riley from the Atlantic Council said the combination of central bank sanctions, ejection from the Swift payments system and an energy embargo could test this brutal but brittle regime to destruction. “We may reach the point where Putin can’t even pay his troops,” he said.

Those in Europe still baulking at an energy embargo should study what happened in 1935 when Benito Mussolini launched a 400,000-strong invasion of Ethiopia, to the indignation of a world moving beyond imperialism. Calibrated sanctions enraged Mussolini without stopping him but pushed him into an alliance with Hitler.

Today the argument is that China will step in to buy the Russian barrels. But this is a myth. It cannot do so in a short enough time-frame to save Putin because Chinese refineries are not adapted to sulphurous “heavy” Urals crude. Russian oil is almost unsellable.

Shell is in public disgrace after scooping up “blood” barrels that nobody else would touch for a $US28 discount. JPMorgan says two thirds of Russian oil is currently shut in. Tankers will not go to the Black Sea ports. Spot oil transactions have stopped. “We’re literally seeing millions of unsold barrels piling up,” says Citigroup’s commodity strategist, Ed Morse.

Brent futures flirted with $US140 on Monday. JPMorgan has pencilled in $US185 in a sustained stand-off. Barclays fears $US200 and a rise in European gas prices to €300 MWh over the [northern hemisphere] summer, 12 times its level a year ago.

West mitigate risks

These sorts of prices imply violent demand destruction and recession. It would be horrible for China, which uses twice as much energy use per unit of GDP as France and Germany, and 2.5 times as much as the frugal UK. The worse it gets, the greater the strain on the Beijing-Moscow axis.

However, the critical caveat is that the West has ways to mitigate the shock, even after a total cut-off of Russian oil. OECD states keep a strategic petroleum reserve of at least 90 days (or should do). Morse says the Western hemisphere could produce an extra 2.5 million barrels a day this year, much of it from US shale and tight oil, but also from Brazil and Guyana.

The US is sending diplomats to the Gulf. RBC Capital Markets’ Helima Croft says the Gulf states and Iraq have up to 2.5m barrels a day in spare capacity that could be mobilised within 30-60 days.

All is forgiven in Caracas. Nicolás Maduro is back from the cold. Croft says a relaxation of sanctions could unlock 600,000 barrels a day. Add in China’s zero-COVID strategy, which cuts jet fuel use, and it is possible to see our way through this crisis. The rest will have to come from de facto rationing.

Canada has already banned imports of Russian oil. In my view the UK should join them immediately and get ahead of the diplomatic curve, which it has failed to do over war refugees.

There is no point searching for ways to help Putin save face at this point. We are past such civilities. Putin’s operation must be closed down immediately by every means available short of Nato declaration of war.

Yes, Putin might respond to an embargo by escalating to nuclear weapons, much as Tojo Japan responded to Roosevelt’s oil embargo in 1941 by bombing Pearl Harbour. But he will threaten to use such weapons again in the future if allowed to prevail today.

Western democracies no longer deem it morally defensible to fund Putin’s war machine with purchases of oil, gas, and coal. They want to see him behind bars in The Hague.

The Telegraph London

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