Exactly one year ago today, Russia initiated its attack on Ukraine, instigating a large-scale international dispute that has resulted in nearly 200,000 casualties and millions of Ukrainians being displaced from their homes (Cooper, et al., 2023). It should be noted that both of these figures are estimates as it is notoriously difficult to accurately predict casualties and displacement in conflict zones. In response, economic sanctions were issued against Russia, effectively removing them from the western hemisphere’s oil and tech markets. These sanctions have had a devastating impact on Russia’s oil market as a result. Their crude oil exports are estimated to be one million barrels per day, about 15% of its output prior to the sanctions (CRS, 2022). In addition to this reduced supply, their crude oil barrels are selling at significantly below market value, with the average price per barrel sitting at $38 USD (Nightingale, 2023). In comparison, the standard market price per barrel sits at $76.32 USD as of today (Charles Schwab, 2023). The main market actors that are keeping the Russian oil market afloat are China and India, both of which refused to issue any sanctions against Russia. This has ultimately been very beneficial for both countries as they have reduced their respective energy costs significantly by taking advantage of Russia’s economic distress.
While this may seem like it has effectively punished Russia, the costs of these sanctions are, for the most part, being passed on to consumers worldwide. This follows a basic economic concept where sanctions cause consumer costs to rise as other higher priced suppliers are sought out to fill the product deficit. As a result of the higher prices, sellers then adjust their own pricing, passing on the increased price to the consumer. This was especially noticeable with the gas industry following the implementation of sanctions against Russia where the average price per gallon of gas rose to $3.49 as the price per barrel peaked at $101 (Shan, 2022). In response to this increase, the Biden administration released 180 million barrels of oil, leveling off the price per gallon to $3.41 per gallon on average (Shan, 2022). To clarify, this is not an unfortunate incident for the U.S economy. Not only did it provide some relief from the crippling inflation that has ravaged our economy since the COVID-19 pandemic, but it also allowed the U.S to arbitrage gas on behalf of American taxpayers. By selling barrels at a market price of $96 in October and buying back barrels in December, the U.S government is arbitraging petroleum products in a very profitable manner. However, the announcement by the U.S that they will be buying barrels back at a price of $70 dollars per barrel has effectively set a price floor for much of the world’s oil market, meaning that it is unlikely that consumer oil prices will reduce by much more in the foreseeable future.