The price of a barrel of oil peaked at $130 this week, its highest since 2008. The pain is already spreading around the world—to people who rely on gas to get to work or oil to heat their homes.
The spike is due in part to the sanctions that the United States and other Western countries have imposed on Russia for its invasion of Ukraine. U.S. President Joe Biden has gone so far as to ban Russian oil and gas imports this week.
But since Russia is the world’s largest exporter of oil, could it actually be benefiting from the price surge? And what are the longer-term effects for the rest of us? Could high oil prices make the West’s inflation problems even worse? Will climate change accelerate or slow down as a result?
Those are some of the questions that came up in my conversation this week with FP columnist Adam Tooze on the podcast we co-host, Ones and Tooze.
What follows is a transcript of the interview, edited for clarity and length. For the entire conversation, subscribe to Ones and Tooze on your preferred podcast app.
Cameron Abadi: How much more money is Russia making from these higher oil prices exactly? The United States has stopped buying Russian fossil fuels, but is Russia still making more profits than it was before the war? And what if Europe does the same?
Adam Tooze: This is a quite tricky question to answer because the dust is really far from settled. But we can take as a benchmark an estimate by Javier Blas, Bloomberg’s commodity specialist, from late February. He estimated that Russia was earning about $350 million a day in oil revenue. And at the time, the oil price was about $90 per barrel, and now we’re up around $130, between $120 and $130. So, if you estimate a one-third increase in prices, maybe somewhat more, then you could be figuring on daily revenues for Russia from oil exports to be $450 million to $500 million. All else being equal.
America’s sanctions against that are irrelevant, really. They’re tiny. That’s part of what’s enabled them. This is part of the game-playing, the symbolism, the signaling. The U.K. is also imposing sanctions, and those, too, won’t affect Russia very severely. Europe is a completely different kettle of fish. So Europe takes 50 percent of Russia’s oil and Asia 42 percent. So a European oil boycott would really hurt. And you have to reckon with the fact that Urals-grade Russian oil, which is a blend of heavier and lighter crudes, is already selling at a kind of reputational discount of as much as 20 percent or even more. So overall, given the loss of markets and this discount, Russia’s oil revenue is certainly not rising right now—that the price increase is offset by these other factors. Though it’s a fine balance, and it depends very much on the Europeans.
All of that is, however, offset by what’s happening on the gas side, which is normally the smaller of Russia’s two energy exports. Gas used to earn about $200 million a day. But the surge in gas prices in Europe has been so intense that estimates suggest that earlier this week, Russia was earning over $720 million a day from gas. So it’s quite possible that the surge in gas revenue driven by surging gas prices is offsetting anything that Russia is suffering on the oil side.
CA: Saudi Arabia seems to be the only country with significant spare capacity to produce more of this crude oil in the short term. What factors into its decisions about whether to cooperate and produce more? What are the economic and political considerations that it might be weighing here?
AT: In January, it was estimated that Saudi Arabia, the United Arab Emirates, and Iraq between them had perhaps capacity for an extra 2.3 million barrels per day. Russia exports 5 million barrels per day into the market under normal circumstances. So that would cover about half of Russia’s supply.
There’s Iran, which, if it were to bring sanctioned capacity online, could probably add 1.3 million barrels per day. But that’s a hugely politically contentious move, and it depends on finalizing the nuclear deal with Iran. It would be contentious at home in the United States with Israel. It would involve Russia, which is a party to the talks. And of course, it would really put up the hackles of the Saudis, who are locked in this regional struggle with Iran for influence.
And Saudi Arabia is the whale, you’re right. It’s really the key to all of this. And U.S.-Saudi relations right now are precariously balanced. Mohammed bin Salman, the de facto ruler of Saudi Arabia, is on extremely poor terms with Biden. The Saudis were very blatant, really, in supporting former President Donald Trump, and they didn’t get their way. But the future of this entire market depends critically not really on the West but on Asia. And so far as China remains, broadly speaking, neutral, Saudi Arabia will think that that’s probably the position to adopt itself. China would probably want an increase in oil, but it isn’t going to exert undue pressure on the Saudis to help the West out.
CA: How exactly do high oil prices contribute to the West’s inflation problems?
AT: This is the trillion-dollar question that is going to increasingly dominate the economic policy agenda. There are two basic logical problems that economists have been wrestling with ever since the first oil price shocks in the 1970s.
The first is: Does an increase in oil prices lead to an overall increase in prices through cost effects? Or does it simply skew the price system, causing substitution and income effects on the other side? So a substitution effect would be, the price of oil goes up, the price of cars goes down, because you want to drive less if you have to pay more for gas. On the other hand, it could also have an effect that is more generic than that. The price of gas goes up for commuters, so they have less money in their budget at the end of the month, so they spend less money on restaurant meals or going to the cinema or going on holidays. That would produce a fall in prices. So in those cases, there’s an offsetting effect from the rise in the oil price.
And the second question is: Can a one-off increase in oil prices explain anything more than a one-off increase in price? How could a one-off increase in oil prices lead to something cumulative, sustained price increases, which is what we call inflation?
The situation in which both things would be true—in other words, you would see general price increases triggered by oil price increases and sustained price increases driven by a hike—would be one in which the central bank essentially accommodates the process and responds to the economic pressure by pumping more money into the economy. We don’t really know how this is going to turn out, but that really is the experiment we’re running in the current moment. Can we, through monetary policy, contain this shock so that it doesn’t become a permanent inflationary surge?
CA: What do high oil prices mean for climate change? Are price shocks good for climate policy because they lead to behavioral changes? Or are high oil prices a problem, maybe because they lead to panicked efforts to lower prices by any means necessary?
AT: I think the way this is going to play out in the United States, unfortunately, looks pretty clear already. And the answer is that this is bad news for climate politics. What it is forcing the Biden administration to do is to focus on the issue of how you secure cheap and abundant sources of energy for the U.S. population. They’ve been quite explicit about their commitment to doing this. And that has involved even putting pressure on OPEC—including Russia, before the crisis exploded—to increase production. And there is indeed talk right now of Washington pressuring Wall Street to release pressure on Texas to increase fracking production, which is the opposite direction of the way we need to go.
Whereas in Europe, the entire balance of this argument runs the other way. The Europeans are desperate. It’s difficult to exaggerate the scale of this crisis there. The gas price in Europe last week spiked at the equivalent of $600 per barrel of oil. We are talking about an epic squeeze on energy prices there. And that feeds through into everyone’s daily lives in a truly dramatic way. So the Europeans are going to be looking for quick fixes, too. They’re going to be trying to build new terminals for liquified natural gas to bring in U.S. fracked gas. They are indeed talking about switching back to coal if necessary. Even the German Greens are recognizing the need to do that.
But in the longer term, in Europe, all of the incentives go the other way. So this is win-win-win now. I mean, a) it’s good for the environment, b) it’s a business proposition to make the energy transition, but c) above all else now, it’s a way of breaking your dependance on Vladimir Putin’s regime, which at this point is critical for the Europeans. So I think all of the pressure is going to head that way.
CA: When would some kind of central planning—whether it’s in the form of direct price controls on oil or energy or some rationing of oil and gas—be justified as a matter of fairness?
AT: I think, concretely, if we end up with a gas boycott or a gas sanctioning regime between Europe and Russia, countries such as Germany, Slovakia, the Czech Republic, all of which are just enormously dependent on Russian gas, would have no option but to go to some sort of government-overseen, government-managed system that would no longer really represent a market. It would be a matter of offsetting prices paid to secure the necessary gas against what can reasonably be charged to customers, industrial and consumer. You would be talking about load shedding for industrial customers on a large scale. I think that’s in the future, if that’s the way we head.
The only thing playing in our direction is that we’re headed into the summer, and so our overall demand will go down. But if we’re still in economic war with Russia in the fall, then I think there are concrete plans, say in the German economics and environment ministry, to do precisely that. Right now, the things that are coming into effect are various types of price caps, which are really to address energy poverty at the bottom of the social hierarchy. And that makes perfect sense. And they’re easy. They’re readily available. But full-scale planning of supply and demand is really quite likely to come into effect if we end up either unilaterally deciding from our side to shut off our consumption of Russian gas or, conversely, if the Russians do it to Europe.
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