A ‘coalition of the drilling’ can starve Putin’s petrodollars
As Vladimir Putin’s army continues its assault on Ukraine, G7 countries have unveiled a price cap scheme on Russian oil exports to limit the Kremlin’s lucrative oil revenues. Despite the good intentions underlying the cap, experience suggests that these efforts alone will be insufficient to bleed the Russian war machine of financial resources. Rather, a genuine commitment to driving down Putin’s petrodollars requires a coalition of oil-producing countries to ramp up the global oil supply.
Current Western efforts to target Russia’s roughly $20 billion monthly oil revenues are ineffective at best, and counterproductive to American national security at worst. The patchwork of Western bans on oil imports is symbolically caveated by the European Union’s carveouts for Bulgaria, Croatia and central European states that rely on the Druzhba pipeline. Supporters of the current embargos point to Russia’s prolific offloading of cheap oil as an indication of their success. But a deluge of discounted energy to America’s rivals and enemies, such as the People’s Republic of China and the Taliban, is a pyrrhic victory for the American national interest, especially when Russia continues to turn a profit on its oil exports.
Recognizing the shortcomings of the current scheme, the Biden administration has spearheaded an internationally coordinated price cap on Russian oil exports. Putting aside global tepid enthusiasm for the cap, the success and enforcement of such an elaborate framework would be unlikely. The G7 announcement implies that only seaborne oil exports would be covered. This provides a clear loophole for China’s existing overland pipeline with Russia. Around one-third to half of China’s Russian oil imports could be maintained through this pipeline, coupled with the short seaborne voyage from Russia’s eastern Kozmino terminal.
Moreover, faith in the efficiency of Western sanctions should be cautioned by Iran’s continued ability to turn a multi-billion-dollar monthly trade in crude oil, despite a comprehensive blanket of American primary and secondary sanctions. Ironically, the same European countries that developed the INSTEX trade mechanism to dodge American sanctions on doing business with Iran would be forced to condemn any similar creativity involving seaborne Russian oil.
These well-intentioned efforts have exclusively focused on diminishing Putin’s war chest by managing and manipulating the demand for Russian oil. However, demand is only half of the price equation. To drive down the Kremlin’s oil revenues, a “coalition of the drilling,” similar to President George W. Bush’s “coalition of the willing” is needed to supercharge global non-Russian oil supply. Hamstrung by climate orthodoxy, the G7 joint statement on the price cap makes a perfunctory call for greater oil production to limit price volatility. Rather than an afterthought tucked away in the final paragraph, bringing more oil to the global market should be the tip of the spear.
Recent pleas for greater oil production in the Middle East, most notably by President Joe Biden, overlook a wealth of production potential beyond the Gulf. The most glaring being that of the United States, where daily crude production remains 1 million barrels below its pre-pandemic March 2020 peak. Although the Biden administration says nothing can be done to boost domestic drilling, captains of the energy industry have detailed a regulatory wish list to regain lost capacity. Focusing the breadth of the bureaucracy on facilitating the production of more oil would make the United States the cornerstone of a winning coalition while bringing more oil first and foremost to domestic markets.
A “coalition of the drilling” would find ready partners among the African members of the Organization of the Petroleum Exporting Countries (OPEC). In July, while president Biden was preoccupied with lobbying Saudi Arabia, five out of seven African OPEC members fell short of their own quotas by more than a collective 1 million barrels each day. Facilitating security, technology and private sector engagement with these countries and their business communities would help them to meet their existing quotas, while simultaneously diminishing the value of Putin’s oil exports.
Both within and outside of the OPEC cartel, several African countries are already preparing to make their collective case for greater oil and gas production at the November COP 27 climate confab. From Nigeria to Uganda, leaders across the continent are publicly acknowledging their own national interest in the alleviation of poverty through greater access to reliable and affordable energy. This chorus has become so loud that the Biden team’s recently released Africa strategy was forced to include lukewarm support for natural gas. Rather than threatening African partners over sanctions compliance, the Biden administration could build a durable coalition to drain Putin’s war chest upon the self-interest of would-be oil producers.
Current efforts to manage and manipulate demand for Russian oil constitute an important first step to starving Russia’s war machine. Alone, however, they amount to a loose patchwork that will become weevil-holed by opportunistic non-compliance and smuggling.
A “coalition of the drilling” — forged through domestic regulatory reform, and international private sector engagement and security assistance — can drive down the value of every Russian barrel of oil.
Oliver McPherson-Smith is a research fellow at the Hoover Institution.