The Worst Deal Ever

The ban on Russian oil may go down in history as the worst deal in the history of this country, maybe ever! Trumping Trump’s famous quip about NAFTA back in the 2016 debates.

The U.S. Announced on Tuesday that Russian oil is no longer allowed in the U.S. This move came as Allies in Europe only pledged to slowly curb their Russia purchases and the World’s #2 economy, China, no where to be found.

The scattered response to the United States’ ban means this move is entirely moot to Russia. While the US did import around 700,000 barrels a day from Russia, those barrel will certainly find a home, most likely in China.

The market for oil is global. Meaning the U.S. looking elsewhere for their oil needs will only marginally decrease Russia’s revenue. More impactful, the United states will be spending more for crude, especially on the West Coast.

The reason for the U.S. purchase of Russian oil was entirely geographical. While the U.S. is a large producer of oil it made sense to buy it from Russia, ship it across the Pacific, rather than try to pipeline it from North Dakota or put it on a tanker in Texas and ship it (likely too large for the Panama Canal so around South America) to California.

Now 700,000 barrels a day sits in the port of Vladivostok looking for a buyer at a decent price. Who sits on the Pacific rim, looking for oil, and friendly with Putin? That’s right, China. China is now going to get oil at a discount thanks to the United States leaving the market. So no only are we barely denting Russia’s war fund, we are reducing costs to China, as they look on with visions of grandeur about Taiwan. We have already seen the discount buyers with no conscious can get. Recently, Shell purchased a tanker-load of crude for a 25% discount (link).

The United States is seeing soaring costs related to the ban already. Oil was already on a inflationary path before the invasion but has gone parabolic since. On Thursday oil settled around $108/barrel, fully 18% higher than it was before Russia invaded Ukraine and the ban was put in place.

The Biden administration is looking at two very unattractive options to “solve” this before the midterms. The first is just to eat the increased costs. The U.S. can buy oil from larger distances away at a premium at risk of rising inflation at home. The second has the administration looking to different rogue regimes such as Maduro in Venezuela.

All of this could be solved with domestic drilling. The administration claims that oil companies are to be blamed for the lack in production increases but any one thinking critically can see this is not the case. First, the administration cites 9,000 permits for drilling are going unfulfilled. This is true but ridiculous. Those permits are for well in place that have zero or poor reserves. A rational permit holder will drill once the price of oil outweighs the cost to get it out of the ground. These 9,000 permits are in places where drilling would not lower the cost of drilling.

The second ridiculous claim is around climate change. The Biden administration has from day 1 been claiming moral victories in the fight against climate change and do not want domestic oil production to be at levels when they entered. The have banned new drilling on public lands and cancelled pipelines that would have made it cheaper by now to get relatively more expensive oil out of Canada and North Dakota. The other less easier factor to measure is that around regulation. Under Biden regulators like the EPA have hired less friendly to oil & gas employees, added more red tape (thus, expenses) to domestic drillers. All of this leads to, at the very least, the same amount of greenhouse gas emissions due to the fact an oil barrel is going to be pumped somewhere. Now instead of that barrel coming out of the U.S. it is getting pumped and transported from countries with dirtier standard than the U.S! Arguably net more emissions.

The Russia oil ban is the worst deal economically, militarily, and environmentally that could have possibly been signed. Both republicans and democrats should reverse course, allow Russian oil in the interim, and ramp up domestic production. This will slowly cut off Russia from our funds, prevent China from getting a deal, and will protect the most important client of the U.S. government, U.S. citizens.