A Modest Proposal: Oppose Russian Move Into Ukraine by Flooding Market With Oil
In his weekly "Notes at the Margin" newsletter, energy economist Philip Verleger proposes that President Obama and Congress agree to release a significant amount of U.S. crude oil stockpiles from the Strategic Petroleum Reserve (SPR), which currently contains 696 million barrels of crude. Depending on the size of the release and the duration, Russian revenues from crude oil sales would fall by about 15%, a substantial number when you consider that the country depends on oil sales for about 50% of its gross domestic product (GDP).
Dated Brent was trading at around $112 a barrel Monday morning, up 3%. Adopting economic sanctions against the Russian incursion into the Crimea, as many officials have proposed, may also have some effect, but everyone would have to pay because the price of oil would rise. Releasing 500,000 barrels a day (90 million barrels total) from the SPR over a period of six months would lower crude oil prices, giving everyone a break.
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As Verleger is careful to point out, the United States would have to consult closely with Saudi Arabia and get the kingdom to agree not to cut production. But given Russia’s support for Syria and Iran, persuading the Saudis should not be too difficult.
Verleger argues that the millions of barrels of oil in SPR are far beyond any needed reserve, given the rapid increase in U.S. production. And selling the oil at around $100 a barrel would add about $10 billion to U.S. revenues in fiscal year 2015.
The Russians, of course, could counter with higher prices for natural gas shipped to Western Europe or by threatening to cut off natural gas shipments altogether. Western Europe's dependence on Russian natural gas supplies -- most of which flow through pipelines in Ukraine -- has visibly muted the eurozone's response to Russia's military move into the Crimea. But cutting back on or cutting off natural gas supplies to Europe only makes Russia's revenue problems worse.
Without energy revenues, the country's finances would be in a shambles. The ruble has already touched a five-year low against the dollar, making Russia's financial difficulties that much worse.
At the rate of around 200 million barrels a year, the United States could continue to pump crude into global markets for more than three years. The Russian economy could not stand the pain, which may bring it to the bargaining table, or it may cause Putin to behave like a cornered wolf. Flooding the crude market is not risk-free, but it probably deserves a thorough examination and public debate.
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