On March 8, 2022, President Joe Biden announced that the United States would no longer allow new shipments of oil from Russia to the United States. Russian oil made up about 8 percent of total U.S. oil imports and about 2 percent of U.S. oil consumption. European countries, which are much more heavily dependent on oil imports from Russia, announced plans to gradually reduce Russian oil imports.
The point of these policy actions was to reduce the revenues Russia would receive from oil exports as retaliation for Russia’s invasion of Ukraine. Beyond the effect of direct action against Russian oil imports, Russian oil exports were reduced further as a result of other sanctions imposed on the Russian economy by the United States and other countries. These sanctions made it difficult for Russia to access shipping services and the international payments system.
The decline in Russian oil exports reduced the total supply of oil on the international oil market, pushing up the price of the oil. The following figure shows the daily price in dollars per barrel of Brent crude oil, which is the most commonly used benchmark price of oil.
Will the actions taken by the United States and other countries reduce Russian oil revenues? As we discuss in Microeconomics, Chapter 6, Section 6.3, whether a seller’s total revenue will decrease as a result of a decrease in the quantity sold depends on the price elasticity of demand for the seller’s product. If demand is price elastic, the revenue the seller receives will fall. If demand is price inelastic, the revenue the seller receives will rise.
In this case, Russia’s oil revenue will decline if the percentage increase in the price of oil is less than the percentage decrease in the quantity of oil Russia is selling. The energy information firm Energy Intelligence has estimated that Russian oil exports have declined by about one-third. On the day before the Russian invasion of Ukraine, the price of Brent crude oil was about $99 per barrel. It then rose to $129 per barrel on March 7 before falling to $109 per barrel on March 10. Based on these values, the price Russia received per barrel of oil increased between 9 and 29 percent or by less than the 33 percent decline in the quantity of oil Russia sold.
Because the percentage decline in quantity was greater than the percentage increase in price, we can conclude that the actions taken by the United States and other countries reduced Russian oil revenue. In fact, the reduction in revenue is probably larger than indicated by the change in the price of Brent crude oil. Media reports indicate that to find buyers Russia is having to discount its oil by more than $10 per barrel from the Brent price. In addition, the countries of the European Union have pledged to reduce Russian oil imports by two-thirds by the end of 2022 and the United Kingdom has pledged to end them entirely. Although Russia might be able to redirect to other countries some oil it had been exporting to Europe and the United States, it seems likely that Russia’s total oil exports will eventually decline by more than the initial one-third.
Sources: Andrew Restuccia and Josh Mitchell, “Biden Bans Imports of Russian Oil, Natural Gas, Wall Street Journal, March 8, 2022; Stanley Reed, “The Future Turns Dark for Russia’s Oil Industry,” New York Times, March 8, 2022; Collin Eaton, “How Much Oil Does the U.S. Import From Russia and Why Is Biden Banning It?” Wall Street Journal, March 9, 2022; “Russian Oil Exports Fall by One-Third,” energyintel.com, March 2, 2022; and Tsuyoshi Inajima and Serene Cheong, “More Russian Oil Deeply Discounted as Ban Risk Alarms Buyers,” bloomberg.com, March 7, 2022. Brent crude oil price data from the Federal Reserve Bank of St. Louis and the Wall Street Journal.