The West’s efforts to sanction Russian energy continue to backfire.
“The fundamental cause of the trouble is that in the modern world the stupid are cocksure while the intelligent are full of doubt.” – Bertrand Russell
Energy has driven much of geopolitical strategy since the advent of commercially developed fossil fuels. World wars have been decided by which side had the readiest access to oil, and diplomats around the globe seem to grasp why the Middle East sits at the center of much political jockeying—it isn’t because of the sand. Our entire financial system is predicated on cheap, abundant energy and would surely collapse in its absence. Energy is life, the lack of energy is death, and there is not much nuance in between.
Ignoring these widely understood and deeply fundamental axioms of power, the current slate of Western leaders demonstrates a complete lack of knowledge of how the global energy markets work. Nowhere is this ignorance more clearly displayed than in the haphazard attempts to reduce Russia’s energy revenue by attacking its supply, a strategy guaranteed to backfire spectacularly for one simple and obvious reason: Putin would more than make it up on price. In early June of 2022, mere weeks into the sanctions regime, we spelled out the associated buffoonery in a piece called “Crazy Pills.” Here is a key passage (emphasis in the original):
“Instead of attacking the supply of Putin’s energy, we should be doing everything in our power to increase ours. That is the only way to lower price and materially impact the funding of his war machine. For highly inelastic products like oil and natural gas, price action works both ways. It does not take significant undersupply for prices to skyrocket, nor does it take significant oversupply for prices to crash. Famously, oil traded as low as minus $37 a barrel at the peak of the Covid-19 panic, proving how precarious the price of energy can be when supply gluts form and there’s no place to put the stuff. If oil were $20 a barrel today, would that help or hurt Putin? The answer is self-evident and yet lost on our leaders, and we’re running out of crazy pills. To be as straightforward as possible, we present Doomberg’s Law of Combatting Dictators That Have Really, Really, Ridiculously Firm Strongholds on Energy™:
Actions that result in a higher global supply of energy hurt, whereas actions that result in a lower global supply of energy enable!”
In April of 2023, nearly a year after the sanctions were levied, we wrote a follow-up article, “The Peter Principle,” in which we tallied the damage and lamented how so few among our political elite were willing to acknowledge reality and pivot accordingly:
“Into the market, Russia’s commodities did indeed flow. Prices globally lifted on the high tide of reduced access to frictionless supply, allowing Putin to undercut the spot rate and move his goods at prices favorable to both opportunistic buyer and sanctioned seller.
As a reward for correctly pointing out the material flaw in the West’s approach to sanctions and suggesting a strategy that was far more likely to achieve the stated objectives, we were accused of being ‘unpatriotic’ and ‘a Putin puppet’ by several accounts on Twitter, even a few we used to respect. Only in our hyperpolarized political environment can recommending a provably better way to defeat a common enemy be considered heresy.”
We closed that piece with a simple but incisive prediction:
“The tragic conflict in Ukraine will drag on until the West increases its domestic production of energy and floods the world with supply. Absent that, Putin’s ability to turn the tables on our sanctions and increase his revenue will continue unabated.”
As the second anniversary of the war in Ukraine approaches, and with the abject failure of the West’s sanctions to dent Putin’s revenue vividly apparent, have our leaders learned anything? Sadly, nothing in their behavior would indicate so. As the situation in Ukraine grows more desperate, they seem to be doubling down on stupidity, eschewing physics in the pursuit of fantasy. As a recent slate of tightened sanctions makes clear, nothing will shake them of their strategic folly. Let’s peruse the headlines and preempt the spin.