The Economic Challenge and Climate Opportunity in Supporting Ukraine

As civilian casualties mount in Ukraine, the Biden Administration is facing increasing pressure to support a ban on U.S. energy imports from Russia. On March 3rd, the Democratic senator Joe Manchin, of West Virginia, and the Republican senator Lisa Murkowski, of Alaska, introduced the Banning Russian Energy Imports Act, which would prohibit the purchase of Russian crude oil, petroleum, liquified natural gas, and coal. More than a dozen senators from both parties put their name to the bill. House Speaker Nancy Pelosi also expressed support for barring Russian oil imports, but the White House expressed concern that a ban could lead to a further increase in gas prices. On Sunday, however, Secretary of State Antony Blinken said that the United States was in “very active discussions” with its European allies about a possible embargo.

Prices at the pump already top four dollars a gallon in some states, and Joe Biden’s approval rating stands at just forty-two per cent, according to the RealClearPolitics poll average, so it’s easy to see why the prospect of another rise in prices would alarm some people in the White House. But, with Russia’s government reliant on energy exports for about forty per cent of its income, the moral argument for cutting off these mammoth revenue streams is hard to counter. “The world is paying Russia seven hundred million dollars a day for oil and four hundred million dollars for natural gas,” Oleg Ustenko, an economic adviser to the Ukrainian President, Volodymyr Zelensky, told me, in a telephone interview from Kyiv this weekend. “You are paying all this money to a murderous leader who is still killing people in my country.”

Ustenko said that he was grateful to the United States and other G-7 countries for the sanctions they have imposed so far, including those on the Russian central bank. Yet more is needed, he argued. “What has been done so far is very good, and it hurts Russia—but it’s not enough,” Ustenko said. “What would be really painful, and what could change the whole story, is if the United States were to introduce a complete embargo on the Russian oil-and-gas industry. Then you are really talking about destroying the Russian economy.”

The United States imports about seven hundred thousand barrels of oil products a day from Russia. These purchases are dwarfed by the huge quantities of oil and gas that Russia sells to countries in Western Europe, many of which have opposed an embargo on Russian energy sales for fear of shortages and corresponding price hikes in their own nations. Ustenko acknowledged this dilemma, but he argued that, if the United States made the first move, other countries could follow suit. “The U.S. government can really make a big difference in this effort,” he said. “They are the superpower. They are able to convince others.”

Ustenko also said that, as an economist, he understood that imposing an energy embargo on Russia could lead to higher prices for Western consumers and businesses. “There are measures and steps that can be taken to mitigate this shock,” he added, and mentioned the possibility of arranging alternative sources of supply. In the end, though, he returned to the moral imperative of cutting off the money that is financing Vladimir Putin’s war machine. “For those of us here in Ukraine, it is blood money,” he said.

The Biden Administration has to weigh these arguments against the potential damage to the economy that could result from another big rise in oil prices. By itself, an American ban on Russian oil imports wouldn’t greatly affect the global balance between supply and demand, which is what ultimately determines prices. (Russia’s exports to the United States represent less than one per cent of the global oil supply.) A broader energy embargo on Moscow, though, would be consequential. All told, Russia supplies about ten per cent of the world’s oil. In an interview with CNBC last week, Darren Woods, the chief executive of ExxonMobil, said that it would be “very difficult for the market to make up” the shortfall from Russian oil. Since the start of the year, the price of crude has risen by about fifty per cent, and some energy experts caution that it could go a lot higher if Russian supplies were effectively removed from the market.

The fallout from soaring oil prices could extend well beyond the gas pump. Higher energy costs—particularly if they are sustained—would add to over-all inflationary pressures. (The annual rate of consumer-price inflation rose to 7.5 per cent in January, the highest in four decades.) “There’s already a lot of upward inflation pressure, and additional inflation pressure does probably raise at the margin the risk that inflation expectations will start to react in a way that is negative,” Jerome Powell, the chair of the Federal Reserve, told the Senate Banking Committee on Thursday. Other analysts share this outlook. “Inflation is a dynamic process and can be self-reinforcing,” the ratings firm Fitch warned on Tuesday. “Global energy price shocks related to the Russia-Ukraine crisis exacerbate risks.”

The ultimate risk is that a further rise in inflation, and inflation expectations, will prompt the Fed to raise interest rates more rapidly than it is currently planning to do, and inadvertently plunge the economy into a recession. Although the link between energy prices and the economic cycle is far from one-to-one, the fact remains that the recessions of the early nineteen-eighties, 1990, 2001, and 2008 were all preceded by a spike in the oil price and higher interest rates.

In short, the question of whether to ban Russian oil imports has placed the White House in an unenviable position: it has to somehow balance strategic, moral, economic, and political concerns. But there is another sense in which the Russian invasion has greatly clarified the choices facing us as a country, and presented us with a historic opportunity to make the United States less beholden to a diminishing stock of fossil fuels and the autocratic governments that control much of it.

For decades, countries such as Russia and Saudi Arabia have used their big stocks of fossil fuels for leverage. Dependent on the oil-and-gas exporters to keep their economies running, many Western countries have tempered their criticisms of those autocratic governments and accepted a de-facto state of dependency. We know how to end this: by hastening the transition to renewable energy sources, creating a clean electrical grid, and using electricity to heat homes and offices and to power transportation.

The good news is that this transformation is already under way. Barely a week goes by without one of the world’s automakers embracing the production of electric vehicles. (Stellantis, which owns Chrysler, Dodge, and Jeep, was the latest). And, last month, the U.S. Bureau of Ocean Energy Management raised nearly 4.4 billion dollars by selling six leases for wind farms off the coast of New York and New Jersey that could eventually provide enough power for two million homes. But these private-sector investments are being made on the expectation that the federal government will do its part to promote clean energy by, for instance, providing subsidies for the creation of a national network of charging stations, and incentivizing electric utilities to reduce the amount of power they buy from power stations that run on dirty fossil fuels.

Joe Biden’s Build Back Better spending plan, which Senator Manchin shot down at the end of last year, contained proposals to do these things. Last week, Manchin told Politico that he was open to a smaller spending bill focussed on prescription drugs, tax reform, and climate. Whatever it decides to do about Russian oil imports, the White House should take the West Virginian up on this offer, and quickly. Doubtless, Manchin will demand protections for his beloved coal industry, such as subsidies for the development of “clean coal.” He is also likely to oppose any resurrection of the Clean Electricity Performance Program, the part of Build Back Better that would have given electric utilities financial incentives to favor renewable energy sources. That is highly regrettable.

Even without the C.E.P.P., though, a climate package focussed on tax credits that encourage renewable-energy investments, energy efficiency, and the purchase of electric vehicles could significantly reduce carbon emissions, climate-policy experts say. It might not meet the ambitious goals that the Biden Administration set last year, but it would be a lot better than sitting on our hands. And it would help prevent future Putins from trying to hold the world to energy ransom—at least one worthy outcome of the tragedy that is Ukraine.

When I spoke with Ustenko, he was primarily concerned about the immediate future and about crippling the Russian military before it can do more damage to his country. But he added that weaning other countries off Russia’s fossil fuels would be an important step for other reasons. “In the middle term and the long term, it is going to be a positive development both for international security and for speeding up the move in the direction of technological change and renewable energy,” he said.