The cost of U.S. oil hit $130 a barrel on Sunday, marking a 13-year high, as frothy markets continued to price in the fallout of Russia invading Ukraine. At the pump, gas prices crept up too, with the average cost across the U.S. spiking to $4 a gallon.
Oil and gas prices are spiking even though the U.S. has not yet formally sanctioned Russian energy.
White House press secretary Jen Psaki told CNN last Wednesday that the Biden administration had excluded Russian energy exports from its sanctions list to avoid “[impacting] the American people more with higher energy and gas prices.”
But despite no legal action urging them to, energy traders are mostly avoiding Russian oil anyway, to avoid being tainted by scandal. In the U.K., port workers have refused to unload shipments of Russian oil in protest over the Ukraine invasion. In the U.S., lawmakers at a city council moved to suspend the operating licenses of Lukoil-branded gas stations. Meanwhile, online, the oil giant Shell was forced to justify why it bought Russian oil at a discount over the weekend.
“Doesn’t Russian oil smell [like] Ukrainian blood for you?” Ukraine Foreign Minister Dmytro Kuleba tweeted at Shell, as the oil company said it had “no alternative” but Russian oil to fulfill its contractual obligations to buyers.
Now, with gas prices already pumped up and no sign of current sanctions deterring Russian President Vladimir Putin from his war with Ukraine, there’s less reason for the U.S. to hold off on formalizing a ban.
“There’s no optimal time to slap sanctions on Russian energy,” says Jeffrey Halley, senior market analyst at Oanda. “It comes down to what level of pain the countries that make up the alliance against Russia are willing to endure.”
Markets are already betting on more pain coming. On Monday, data from London’s energy futures exchange showed traders have piled into options that bet on oil prices shooting to as high as $200 per barrel by the end of the month. J.P. Morgan analysts are only a little less bullish, predicting oil prices will surge to $185 per barrel on the back of Russia’s invasion of Ukraine.
But, when it comes to blocking Russian energy exports, the U.S. and the EU—which constitute the bulk of the NATO opposition to Russia’s war in Ukraine—face very different types of pain. In the EU—which buys 60% of Russia’s oil exports and relies on Russia for 45% of its gas supply—a blockade on Russian fuel could leave citizens without heating during harsh winters, as member states struggle to source alternatives.
Adam Pankratz, a professor at the University of British Columbia’s Sauder School of Business, told Fortune last week the worst-case scenario for the EU “is that people start dying because they can’t heat their homes.”
In the U.S., the pain of oil sanctions will be limited to higher costs for consumers, but the government could easily offset the fallout of blocking Russian oil—which provides roughly 600,000 barrels a day to the domestic market—by ramping up domestic shale oil production.
Increasing domestic oil production would mean temporarily backtracking on President Joe Biden’s environmental goals, which could disappoint Democrat voters. But if the alternative is a $200 barrel of oil and costs well above $7 at the gas pump, voters might be willing to let environmental targets go on the back burner.
“I think the higher petrol prices go, the more inclined the U.S. population will be to accept that you can’t sanction Russian oil and keep domestic production in decline,” Halley says.
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