Victory for Ukraine Requires Destruction of Russian Oil Industry

In Andriy Yermak’s Wall Street Journal (WSJ) Op-ed of March 23, it was argued that in order to defeat Russia: “The West must ratchet up sanctions to make Russia’s oil trade less profitable, while also increasing Saudi and US oil output. The West should also cut off Russia’s access to technologies, including by imposing sanctions on intermediaries.”

I would like to offer a friendly amendment to this article. Mr. Yermak is correct in identifying the Russian vulnerability from lost oil revenue and the need to increase non-Russian oil production. But appealing to the US and Saudi Arabian governments to increase oil production to drastically reduce the price of oil is the wrong tack to take. A political appeal to act strategically in support of Ukraine will be ineffective.

Saudi Arabia needs high prices as much as Russia does. They have resisted pressure from the Biden Administration to increase production to bring US gasoline prices down. There is credible evidence that Saudi attempts to undercut Soviet oil prices is apocryphal. Professor Steve H. Hanke, currently of Johns Hopkins University responded to Mr. Yermak in the WSJ. He stated that Saudi Arabia increased production in 1986 to drive down prices, “to discipline OPEC members who were cheating on their quotas and drive marginal non-OPEC producers out of the market.”

But let’s suppose there is an element of truth that Saudi Arabia also intended to undercut Soviet income. During the Cold War, Saudi Arabia had a strong interest in undermining a communist Soviet Union. It reinforced Saudi support for the mujahedeen in Afghanistan and Muslims subjugated within the Soviet Union. A 21st century war characterized as a war between democracy and autocracy will not generate the same support. Saudi Arabia has no interest in protecting democracy.

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Why increased US production, sanctions and oil price caps are not the answer

The US, then as now, is unlikely to support a drastic drop in oil prices because it would undercut the US oil industry as well. The US oil industry suffered from excess capacity that developed due to the fracking revolution and then suffered further from the huge drop in demand during the Covid-19 pandemic.

Supply had expanded quickly as many companies took advantage of the new technology. Pre-Covid-19, OPEC increased production to try to keep US frackers from taking market share. The competition was costly to everyone in the global oil industry. When Covid-19 cratered demand, many companies went bankrupt. Since then, oil drillers, lenders, and investors were all cautious about expanding production when demand returned. They will not increase production without being confident of sustainable profits from the effort.

US President Joe Biden doesn’t have the political capital available to influence OPEC or the US oil industry to increase production. The climate change faction of the Democrat Party wants to phase out and eliminate the oil industry. Helping President Biden and the Democrats lower oil prices isn’t in the best interest of the industry. His appeals to increase production to lower prices for US drivers have repeatedly fallen on deaf ears.

Sanctions will never be sufficient to bring down the Russian economy. It is difficult to defeat any country with sanctions. Russia is better endowed than most with substantial resources to sustain the Russian people. As long as Russian President Vladmir Putin can supply the Russian people with sufficient food, water, housing, and energy, the economy is unlikely to be undermined.

Additionally, oil price caps have only had a small impact. The high demand for energy products will cause people to find a way to trade it despite any sanction regimes – especially when it involves major countries like Russia, China, and India that are better able to resist sanctions.

Destruction of Russian oil infrastructure is the new reality

Instead of relying on political leaders and decisions, Ukraine should rely on free market forces. Ukraine must systematically destroy the Russian oil refineries, pipelines, storage, and export infrastructure faster than it can be repaired and before Russia can develop import substitutes for foreign made equipment. This will initially drive-up global oil prices, but it will incentivize OPEC, the US oil industry, and other producers to increase production.

Physics combined with incentives will trump human laws every time. That is working in Russia’s favor now. Destroy the Russian oil industry and it will work in Ukraine’s favor instead.

Russia currently lacks the technical capacity to fully replace destroyed equipment. It is reliant on imported equipment from Western nations to keep the refining and processing sector fully operating. Much of this equipment will not become available until sanctions are lifted after a peace treaty.

Destroying Russia’s top source of foreign exchange will also reduce its capacity to buy replacement oil industry equipment covertly, as well as military and dual-use equipment and components.

The US mustn’t pressure Ukraine to cease attacking Russian oil infrastructure as has been widely reported. They are valid military targets. Instead, the US and all supporters of Ukraine should authorize the use of all supplied weapons for strikes inside of Russia against valid military targets.

Once the war began, it was always going to lead to attacks inside of Russia. Russia was not deterred from invading Ukraine. Now, Mr. Putin cannot and will not retreat. Therefore, Russia must be defeated. Western leaders must adjust to this reality, since reality will not adjust to their wishful thinking.

Oil can be a significant factor just as may have happened during the Cold War, but not in the same way. Instead of undercutting prices, Ukraine must create the conditions necessary to provide price support and greater market share for OPEC and the US oil industry. This is the 2024 recipe for success.

Michael Rogers is a U.S.-based policy, strategy, training, and operations consultant.

The views expressed are the author’s and not necessarily of Kyiv Post.