I give President Biden credit for his decision to ban the import of 672,000 bbls/d of Russian crude. True bipartisanship is agreeing with the other party when the decision is the right one.
On November 10, 2021, National Security Advisor Jake Sullivan “emphasized the United States’ unwavering commitment to Ukraine’s sovereignty and territorial integrity.” Banning Russian oil EVEN THOUGH it will likely push WTI prices to $150+/bbl is the most powerful weapon we have at this point to de-escalate the situation. If we want to support an independent Ukraine, we must be willing to damage our economy and do more than virtue signal to do so.
Of course, the Biden administration will use this as a push for consumers to adopt EVs because "they are cheaper and aren't reliant on Russian crude." That the administration won't concurrently explain that all the minerals for the batteries, the wind turbines and the solar panels we need to generate renewable electricity at home come from hostile countries as well. Nor will they explain the rationale of not supporting expedited permits at home. But, we can talk about that another day.
For Russia who exports 7 mmbo/d and overall, produces 10% of the world's 100 mmbo/d consumption, this is a meaningful sanction (although it’s important to note many companies and countries were already restricting their purchase of Russian crude so the administration is simply putting themselves in a place to take credit for the sanctions and formalize that which was informal).
Short of a lockdown, demand for oil is relatively inelastic in the short term and so, gasoline is likely to hit $10/gallon. Talk about the “Great Shrug.” Higher prices ultimately will encourage more work from home, less travel, less flights and less consumption... all of which are required to get inflation under control. Consumption is the only way to truly impact the climate, and higher prices are the only way to reduce it. The wily political will realize that as war recedes, now is the time to triple gasoline taxes and use that revenue to pay for the infrastructure bill. If you want less reliance on Russian crude in 2023, you must reduce demand through consumer reaction to price.
Next up, all eyes will be on the Federal Reserve, who needs to raise interest rates over the next year to 3% and immediately stop buying $80 billion a month of MBS and treasuries. It will be bad for the stock market. It will be bad for the housing market. But it is the only rational economic action to take following the last 2 years of unlimited stimulus. The US Federal debt has gone from $5.6 trillion in 1999 to $30 trillion today. We have borrowed from the future to pay for our lifestyle and idyllic policies, a funding scheme that can’t last forever.
In short, there is too much liquidity, too many tech companies with insane valuations, and too much speculation. Raising rates will protect the USD and force austerity into the budget, just like the expense of access to energy and freedom will be real. I believe it’s time we acknowledge Peter will need to be paid, and ready ourselves for the impact to our lifestyles.
Remember when Elizabeth Warren campaign promised to ban frac’ing on day 1? Imagine the scenario of today had she been successful . . .