U.S. to ban oil imports from Russia as White House explores drastic plans to buffer economy from energy shock

Source: By Jeff Stein, Tyler Pager and Anna Phillips, Washington Post • Posted: Tuesday, March 8, 2022

President Biden on Tuesday acknowledged the pain higher costs were inflicting on Americans, but he said the U.S. and its allies had to economically isolate Russia

The United States and European Union took steps on Tuesday to dramatically scale back imports of Russian energy, attempting to economically isolate the Kremlin following its invasion of Ukraine even if the moves lead to higher oil prices for millions of consumers worldwide.

At the White House, President Biden said he was banning all imports of oil and natural gas from Russia, effective immediately. The United Kingdom also announced an immediate ban on all Russian oil products by the end of the year.

E.U. officials, meanwhile, unveiled a separate plan to cut Russian gas imports by approximately two-thirds this year — though questions quickly emerged about whether the European nations would be able to achieve that goal.

The consecutive blows to Russia’s energy sector immediately reverberated throughout the global economy. Gas prices in the United States continued their rapid ascent, climbing to an average of $4.17 a gallon on Tuesday, up from $3.62 just one week ago, according to AAA. Economists have begun warning that the energy price shock could hit European economy particularly hard. Russia is the world’s third largest producer of oil, and reliance on its exports is so high that Western leaders had initially ruled out targeting its production. But Russia’s sustained attacks on Ukraine led Western leaders to change course, even if the decision proves particularly painful for European nations, some of which depend on Russia for as much as 80 percent of their energy needs.

The White House announcement came amid a rising bipartisan clamor to intensify economic penalties against Russia. As Biden administration officials readied their plan in recent days, they held a wide range of talks in an attempt to contain the economic fallout. These included discussions with other oil producing nations as they explored how the U.S. could protect American consumers from higher prices.

The energy restrictions and rising prices now stand to pose a dramatic test of how willing the American and European publics will prove to endure economic hardship to support the Ukranian war effort.

“Americans have rallied to support the Ukrainian people and have made it clear we will not be part of subsidizing Putin’s war,” Biden said Tuesday, explaining why he was banning the imports. “This is a step that we’re taking to inflict further pain on Putin, but there will be costs as well here in the United States.”

Biden added: “I said I would level with the American people from the beginning, and when I first spoke to this, I said defending freedom is going to cost us as well in the United States.”

The global response was immediate. Russian President Vladimir Putin reacted to the announcement with a decree instructing his Cabinet to produce a list of items to stop importing and exporting until 2022. Russia also this week threatened to cut the flow of gas via the Nord Stream 1 pipeline to Europe in response to the west’s financial penalties.

But the political and corporate backlash against Russia has been tremendous. Also on Tuesday, global energy giant Shell apologized for past purchases of Russian petroleum products and agreed to phase out all involvement with the country’s oil and gas industry. It joined ExxonMobil and BP in suspending its operations in Russia.

Ukranian officials, meanwhile, were encouraged by the steps taken by the Europeans and Americans to reduce dependence on Russian energy imports, according to Sergey Nikiforov, a spokesman for Ukraine President Volodymyr Zelenskyy. But Ukranian leaders have also pushed the west for a much broader ban on Russian goods.

“We would like to have an embargo on all Russian goods and services — not only oil and gas. We want all world ports and all world channels closed for Russian vessels,” Nikiforov said in an interview. “Everyone should try to do more. But it is important that those countries started taking some steps to reduce their dependence on Russian fossil fuels.”

The U.S. has already deployed a number of economic measures to hurt Russia, including imposing sanctions on its central bank and on oligarchs close to Putin. But none is nearly so sensitive to the the White House politically as energy prices. Biden has already spent much of the last year on the defensive over inflation, and gas is the single most visible commodity paid daily by tens of millions of American consumers.

Signs have already emerged that the new moves could push prices even higher, with some analysts speculating that prices could breach $5 a gallon later this year.

Higher gas prices impact many sectors of the economy. Airlines raise their prices, passing along the higher costs to consumers. Drivers often change their behavior, cutting back on travel. And prices on products that are delivered by trucks also can increase, creating a new wave of inflationary pressures.

Russian oil only accounts for roughly 3 percent of U.S imports and are expected to be easily made up by other sources in America. And while the Europeans are highly dependent on Russian gas, the plan they introduced on Tuesday appears to allow for the continued importation of Russian products should alternative energy sources fail to materialize in time.

But analysts say the moves still inject an unprecedented turmoil in energy markets that set the stage for continued escalation likely to push prices higher. Currently, Russia produces about 11 percent of the world’s oil, or roughly 10.5 million barrels a day.

“The bottom line is these countries are thinking and doing the unthinkable,” said Bob McNally, consultant and president of Rapidan Energy Group, an energy market research firm, and a former official in the George W. Bush administration. “As long as this conflict threatens to disrupt most or all of Russia’s exports … commodity prices will continue soaring until they cause or contribute to a recession.”

America’s ban is effective immediately. No new contracts will be allowed and existing contracts will have 45 days to end, a senior Biden administration official told reporters on a call.

As they moved closer to announcing the ban, senior Biden administration officials spent the last several days exploring drastic measures to try and protect the global economy from the potential fallout of even higher oil prices.

White House aides, for instance, have studied plans to dramatically scale up U.S. production of energy-efficient heat pumps that they hoped could be used in Europe if European leaders decided to cut its imports of Russian oil, said three people with knowledge of the matter who spoke on the condition of anonymity to discuss private deliberations. Biden officials have weighed whether these heat pumps could be produced through the Defense Production Act, an emergency national defense law, or through procurement programs at the Department of Defense, the people said. Some advocates close to the effort have compared the idea to the “Lend-Lease Act” program through which the U.S. sent critical supplies to the Allied nations that had been invaded by Germany in World War II.

Biden administration officials have simultaneously launched an effort to explore what the administration can do to get other authoritarian countries to ramp up their production of oil — including by relaxing sanctions on Venezuela — to buffer the global economy from the blow.

Biden aides have also explored yet another release of the Strategic Petroleum Reserve — which would represent the third recent move to tap the nation’s oil reserves, although such a measure would likely be months away — and revived discussions about a gas tax holiday to help alleviate Americans’ price pressures at the pump, two other people with knowledge of the deliberations said.

Additionally, Biden has personally expressed support for recasting the administration’s clean energy proposals as part of an attempt to move America away from its dependence on authoritarian petrostates, according to two people aware of the president’s thinking on the matter.

Republicans have argued that the Biden administration has proven hostile to new drilling, curtailing domestic production and putting the U.S. in a vulnerable position. After a ruling last month in which a judge barred the government from considering the cost of climate damage in its decisions, the Interior Department decided to indefinitely pause new lease sales and permit approvals.

“I just don’t understand the sort of religious zealotry that they have against increasing domestic production. Why was it that a barrel of oil a day produced in Iran, Saudi Arabia or Russia is better for the climate than a barrel of oil produced in the United States?” Sen. Marco Rubio (R-Fla.) said.

White House press secretary Jen Psaki said on Monday that the oil and gas industry has 9,000 approved permits to drill on public lands that it has yet to use.

On Tuesday, Biden made a direct appeal to energy companies, calling for restraint in how they price their products. The warned them against “price gouging” and told them not to “exploit this situation or American consumers.”

Some Democratic officials have said that the moves are necessary to punish Putin, even if prices spike.

“History is going to remember much better what we did or did not do to stand up for freedom than it is going to remember the inflation rate, or the price of gasoline, in the spring and summer of 2022,” said Larry Summers, a former Democratic treasury secretary who remains in close contact with senior White House officials.

Sean Sullivan and Mike DeBonis contributed reporting.