Photo by Andrey Rudakov/Bloomberg via Getty Images
The new sanctions imposed on Russian oil companies by the US and EU today are being sold as an act of geopolitical strength. The Trump administration has declared that the sanctions are a response to “Russia’s lack of serious commitment to a peace process”, but they are also a response to something that is arguably still more powerful: the price of oil. A huge increase in stockpiles worldwide have depressed the price of crude, creating the space for sanctions to be imposed.
Vladimir Putin moves when the oil price is high. In 2008, with crude over $120 a barrel, he sent troops into Georgia. In 2014, with oil over $100 a barrel, he invaded Crimea. When Russia invaded Ukraine in February 2022, the world was confronted by a perverse reality: the war wasn’t really costing Russia anything. One analyst told me at the time that Russia’s military costs were “basically covered” by the oil market. The sharp increase in the oil price caused by the war meant a sharp increase in Russia’s current account, which in 2022 recorded a surplus of more than $237 billion.
Western countries could do very little to prevent Putin being enriched by his own war, because to impose sanctions on Russian oil would have driven prices still higher, and this would have imposed still greater inflation on their citizens. However, this dynamic also works the other way.
This year, while other factors such as Trump’s tariffs and war in the Middle East have caused swings in the oil market, an underlying trend has been quietly eating away at prices. Other countries, most notably China, have increased their oil reserves by hundreds of millions of barrels. An additional 330 million barrels have been added to reserves so far this year and inventories still building at a rate of more than two million barrels per day. This has pushed the oil price down, and provided the space for the US and EU to sanction more Russian oil without pushing prices up to the point where voters notice petrol or food becoming more expensive.
This is an opportunity that has been created not by the US or the EU, but by a state Russia considers closer to being an ally: China. The energy analyst John Kemp explained that while China continues to buy oil from Russia, it has also instructed its oil companies to increase their reserves. This is exactly what Britain did in the 1930s, and the US in the 1970s: “If you’re reliant on oil imports and you fear that they might be cut off in a conflict, the way that you deal with it is to hold strategic stocks. The Chinese, as they become more and more dependent on oil imports, are doing the same thing. They’ve been boosting their strategic reserves. They’ve been mandating that oil companies need to hold more stocks to cover a possible loss of imports.”
The new sanctions package was not a masterstroke of Trumpian diplomacy, then, but a co-ordinated decision between the US and EU to take advantage of the opportunity the market presented. With “a surplus of more than a million barrels a day,” Kemp said, it became possible to “take that amount of Russian crude off the market… That’s the calculation.” The new sanctions did lead to a jump in oil prices – described by Paul Donovan, chief economist at UBS wealth management, as “a small blip” – but the result, even with Indian refiners committing to buy less Russian crude, currently appears affordable.
“Sanctions policy tends to be a function of price,” Kemp added. “So the more prices fell, the more likely it was that they were going to go for an ambitious sanctions package. And that is indeed what they’ve done.”
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There is only so much spare capacity in the market, however, and the US in particular will be considering its relations with other major oil producers. American warships are currently gathered off the coast of Venezuela, which has the world’s largest oil reserves. Iran is also one of the world’s largest producers. It is unlikely that Trump would be able to achieve his aims with Russia, Iran and Venezuela while maintaining the oil price at level acceptable to voters, said Kemp: “You can’t actually tighten the screws on all three countries at the same time”.
[Further writing: I thought Labour would fix everything. I was wrong]
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