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Mikhail Khodorkovsky, former political prisoner and CEO of Yukos Oil, is the author of “The Russia Conundrum: How the West Fell for Putin’s Power Gambit — and How to Fix It.”.”
I applauded the good intentions of Western countries when they introduced a price cap on Russian oil earlier this week, and other measures aimed at targeting the Russian oil industry. Weakening Vladimir Putin’s ability to wage his barbaric war against Ukraine is vital, and a vigorous Russian energy policy is an important part of that effort.
I wonder, however, whether such complex measures are likely to achieve this goal or, through unintended consequences, undermine it.
I recently spoke at an energy industry conference attended by several leading investment bankers and energy companies. I asked my audience a question that has bothered me for months: whether the goal is to reduce the amount of money going into Putin’s military budget and encourage an end to Western dependence on Russian hydrocarbons, why do we need complicated mechanisms like price caps? , and not simply agree to impose duties on Russia for the export of its oil?
Imposing duties on Russian oil exports would be simple, understandable and easily administered. This would increase Kremlin spending without the host of unpredictable consequences on global energy markets that a price cap could trigger. Some of these consequences could end up being exploited by Putin, to the detriment of democracies trying to subjugate him. The complexity of a price cap raises a host of issues and opens up more than a few potential loopholes.
When I asked the question at the conference, however, I did not get an answer. I never do.
There is an idea that the price cap will help bring China and India, which have been willing buyers of Putin’s oil as Western nations seek to reduce their imports, into compliance with international sanctions; but that seems unlikely to me. I would caution against policies that rely on the cooperation of powers that have been at best unreliable in the fight against Putin’s barbarism and at worst complicit in it. These powers are likely to profit because they will end up paying Russia less than the world price at which the West will buy from other suppliers.
A possible boom in global corruption will follow, as shipping industries and service providers face attempts to circumvent the cap, through falsified documents and other tricks. Enforcing the cap will require a monumental diplomatic and administrative effort.
And meanwhile Putin’s oil will keep flowing and the money will flow.
We need thoughtful policy, not knee-jerk reactions based on the emotional need to be perceived as doing ‘something’. We need to be clear in our analysis about how Putin will feel the energy sanctions. Realistically, hydrocarbon exports only represent around 20% of Russia’s GDP and even less when measured in terms of purchasing power parity. But when you look at Russia’s federal budget, where the money for the war comes from, the figure is more like 50%.
In other words, of every dollar paid for oil, gas or coal, 50 cents are turned into bombs and bullets killing tens of thousands of Ukrainians, destroying Ukrainian cities and causing the latest refugee crisis in Europe.
So what should we do about it?
First, let’s be clear: it’s not about the cost per barrel but about the size of Putin’s profit. The price cap focuses only on the former, but it is vital not only to reduce Putin’s oil industry turnover with a partial boycott, but also to attack its profits by increasing its spending. Homework would get there. The same would apply to technological sanctions – by preventing the sale of the technological components that Russia needs for the production of hydrocarbons, we would increase its costs of producing oil and gas.
Secondly, we need to realize that the hydrocarbon market is global and that a significant restriction of purchases from one supplier, without getting along with other suppliers – not exactly a democratic and cooperative club of nations – and without reducing the consumption, leads to higher price increases that almost completely offset the reduction in supply. This is what we have observed since the beginning of the year. A price cap, although intended to reduce world prices, could have the opposite effect.
Third, without a decisive military defeat in Ukraine, Putin will continue to engage in energy blackmail. It would be naive to think that a rampaging dictator will be brought to heel by fluctuations in the price he gets for his oil, rather than by Ukrainian military victory. Policies targeting its hydrocarbons can be helpful but are no substitute for providing Ukraine with the weapons, equipment and training it needs to do its job.
In the short and long term, the West must develop its energy autonomy, and not tinker with the conditions of its dependence on dictatorships. It is both a moral and a practical necessity.
Here too, ordinary people and even political leaders need a more comprehensive understanding of what constitutes the energy supply. It’s more than electricity alone. It is heat and fuel for vehicles. It is also energy-intensive “secondary” products, such as nitrogen fertilizers, steel or aluminium, for which energy represents the largest share of production costs.
“Green energy” currently contributes up to 15-20% of Europe’s energy needs. The rest is coal, gas, oil, uranium and timber. Increasing the contribution of solar and wind energy to even 30% of Europe’s overall energy supply is an ambitious but laudable challenge. This is not just an industrial challenge but a cross-societal challenge, requiring rooftop solar panels, local wind turbines, heat pumps and insulation audits of every building. It is a monumental task and a fantastic opportunity for Europe.
But it’s not enough. If Europe really wants to stop entrusting energy to dictators, then nuclear energy and LNG will have to be part of the mix. LNG would act as a “bridging bridge” in the lead up to the achievement of the grand goal of achieving energy independence. In addition to undermining Putin and other tyrants, decarbonizing the economy would bring the added bonus of solving the climate crisis.
Can Europe do this? I firmly believe that 350 million people, on the continent that has shaped our civilization, can achieve whatever they want. The question is: will they? And to that, I have no answer yet.