Oil prices spiked to their highest levels since 2008 on Tuesday after the U.S. announced it would ban imports of Russian oil.
“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,” said President Joe Biden in a press conference.
That means Russian oil would not be accepted in U.S. ports, Biden said.
“We will not be part of subsidizing Putin’s war,” he added.
The ban could go into effect without the participation of European allies, who “may not be in a position to join” the U.S., Biden said. The U.K. announced it would phase out Russian oil and oil products by the end of 2022, while the European Union said it was planning to reduce the continent’s reliance on Russian gas by two thirds by the end of the year.
Biden acknowledged that while the ban could “inflict further pain on Putin,” it could also be costly in the U.S. as oil prices rise in response to the ban.
The Biden administration had been facing pressure from Congress to impose energy sanctions on Russia, a move that the White House has resisted, citing concerns over their impacts on oil prices.
That seemed to change over the weekend when Secretary of State Antony Blinken said on CNN that the U.S. and allies were looking “at the prospect of banning the import of Russian oil, while making sure that there is a still an appropriate supply of oil on world markets.”
Oil prices have climbed more than 60% so far this year. On Tuesday, West Texas Intermediate crude rose as high as $128 a barrel, while international benchmark Brent crude rose as high as $132 a barrel.
Here’s what could happen now that the U.S. has imposed oil sanctions on Russia.
What’s Included in the Oil Ban?
Biden’s executive order bans the importation of Russian crude oil and certain petroleum products, liquefied natural gas, and coal. It also bans new U.S. investments in Russia’s energy sector, and prohibits Americans from financing or enabling foreign companies that are investing in the Russian energy sector.
How Much Oil Do the U.S. and U.K. Import From Russia?
Russia is the third-largest producer of petroleum after the U.S. and Saudi Arabia, exporting almost 5 million barrels a day of crude oil in 2020, according to the U.S. Energy Information Administration. Almost half of those exports went to European countries, while 42% went to Asia and Oceania.
The U.S. imported about 8% of its oil and refined products from Russia last year. Most of the oil imports come from Canada, Mexico, and Saudi Arabia, but the amount of imported Russian oil has been increasing over the past few years, according to data from the U.S. Energy Information Administration. In 2020, the U.S. imported around 200 million barrels.
Last year, oil imports from Russia dropped because companies feared sanctions from rising geopolitical tensions, said Amy Myers Jaffe, energy consultant and director of the Climate Policy Lab at Tufts University.
Imports from Russia made up less than 4% of total U.K. gas supply in 2021, according to the British government. Most of the U.K.’s supply is either domestic or imported from “reliable suppliers such as Norway,” according to a government fact sheet.
Who Signs Off on an Oil Ban?
Sanctions generally fall under the authority of the executive branch, and tend to take shape as an executive order. The White House confirmed that Biden will sign an executive order announcing the ban.
Before signing off on sanctions, the president consults with his National Security Council and other agencies to determine the impact of the sanctions. In this case, the Biden administration is also consulting with its allies on the sanctions, Blinken said.
Congress also has the authority to initiate sanctions through legislation. Lawmakers introduced a bill on Thursday with the intention to ban imports of Russian oil, but the president would need to sign the bill into law for it to go into effect. Congress can override a presidential veto, but that process is lengthy, and rare.
Who Executes the Sanctions?
The executive order typically gives the Treasury the powers to execute the sanctions, in cooperation with the Secretary of State. Within the Treasury, it falls to the director of the Office of Foreign Assets Control, who signs off on the sanctions.
How Soon Would a Ban on Oil Go Into Effect?
Sanctions officially go into effect on the date designated by the Treasury Department, but it can take several days, weeks, or even months for the entities on the receiving end to feel their impact.
How Long Will It Take for the Ban to Impact Oil and Gas Prices?
Markets respond to the sanctions in real time. Since news of the ban broke on Tuesday, Brent crude rose around 7%, but prices will remain high and volatile for a few months, Wells Fargo analysts wrote in a research note Monday. The past week has seen one of the fastest rises in prices on record, with crude climbing over 30% since Russia invaded Ukraine.
When Was the Last Time the U.S. Levied Sanctions Against Oil Imports?
The U.S. has a long history of using oil sanctions as a tool in foreign affairs.
When Iraq invaded Kuwait in August 1990, the U.S. banned all trade and financial resources, including oil. The ban lasted for several years, although a United Nations resolution allowed Iraq to trade its oil for approved goods.
In recent periods, the U.S. has imposed economic sanctions against oil imports from Iran, Russia, and Venezuela. Sanctions targeting Iran’s oil sector date to the 1980s. The latest sanctions, passed in 2011, discourage oil importers from purchasing crude oil from Iran. Those sanctions intensified in 2019 under the Trump administration, which had the aim of reducing Iran’s oil exports to zero.
The U.S. also enacted oil sanctions against Russia through an executive order since 2014, which applied to certain Russian oil companies. Those sanctions limited the companies’ ability to finance debt and access oil exploration technology. A report by the Congressional Research Service found that Russian supply didn’t “appear to have been affected by these sanctions” in the near term.
How Could the Government Reduce the Impact of Sanctions in the U.S.?
The Biden administration has approved the release of 30 million barrels of oil from the Strategic Petroleum Reserve, and coordinated with other countries to release an additional 30 million. The move is designed to add supply of oil back into the marketplace to make up for constrained Russian supply. In total, the administration has committed to releasing over 90 million barrels from the reserve this fiscal year.
Analysts believe there could be more releases ahead, especially if negotiations with other oil producers stall.
The U.S. also could also turn to other oil producers to help make up for Russian imports across the global market. This action could help alleviate global strains on oil supply in the short term.
In the long run, the U.S. could always step up drilling. The Covid-19 lockdown in 2020 curbed production of U.S. oil. As demand has increased, so have drilling efforts, Jaffe said. But oil distilleries tend to make their drilling plans a year in advance, and most didn’t account for the leap in demand and the geopolitical constrains that would erupt, Jaffe added.
“If we ever got to the point where we’re really in a war emergency, there are structures put in place that would allow the U.S. government to help fund drilling if we needed to,” she said.
On Tuesday, Biden said the U.S. was scheduled to reach record oil production next year.
Where Else Could the U.S. Turn to for Oil?
The White House was looking to ease oil sanctions on Venezuela temporarily in a bid to increase oil exports from the Latin American country, The Wall Street Journal reported. U.S. officials began face-to-face meetings with Venezuelan representatives over the weekend.
The U.S. could also turn to OPEC members, including Saudi Arabia, to boost export capacity.
“While senior Saudi officials continue to publicly endorse the current OPEC+ easing arrangement and partnership with Russia, we do believe that the Kingdom could potentially be willing to resume its central banker role and attempt to avert a calamitous global economic crisis,” wrote RBC Capital Markets analyst Helima Croft in a research note.
The market is also closely scrutinizing the negotiations for a new nuclear deal in Iran. If a deal is reached, Iran could increase production by more than 1 million barrels a day if it exits the nuclear sanctions penalty box, raising global production by about 1.5%. Russian negotiations may have stalled the deal over the weekend, as they demanded guarantees that new sanctions wouldn’t impact Moscow’s trade with Iran.
What Happens Next?
The U.S. is having an “active discussion” about the possibility of oil sanctions with its other Western allies, Blinken said. But because Europe is a greater importer of Russian oil, there may be more resistance against imposing sanctions.
“While Russia’s economy will be hurt the most, Europe will likely fall into a recession and U.S. growth will be hit, with consumers feeling the most pain,” wrote Hussein Sayed, chief market strategist at Exinity.
Croft also believes it will be important to watch whether Washington would place secondary sanctions on the Russian energy sector, which could curtail Indian and Chinese imports.
The sanctions and subsequent shock to oil prices could also lead the U.S. and other major economies to adapt to the changing energy environment, said Paul Donovan, UBS Global Wealth Management chief economist in a call on Monday.
“People will adapt, whether that is faster adoption of alternative energy, or sudden changes to improve energy efficiency,” Donovan said.
Some analysts believe the current spike in oil prices could derail efforts to transition toward clean energy in the short-to-medium term as officials look to secure supply chain-resilience, but speed it up in the long run.
“The uncomfortable truth is resilience in supply chains has taken the front seat over saving the planet, and I am expecting nuclear, coal, shale and gas to get a new lease of life as the price of bringing Russia to heel and isolating them,” wrote Jeffrey Halley, Oanda senior market analyst.
Write to Sabrina Escobar at [email protected]