I am inclined the think that the answer to this question is a resounding “Yes”!
But the issue is complicated, because oil, and natural gas to a lesser extent, are globally traded commodities. It is absolutely true that Russia depends on the revenues from oil and gas sales. If we could cut off these revenues, it would be tremendously helpful in forcing Putin to alter his course. But can we?
Unfortunately, oil is a, mostly, fungible commodity. If oil is not exported from Russia to western Europe, it can with relative ease be exported to other countries, notably China. Switching the direction of these exports is not costless for Russia. The pipelines for the export of oil are, presumably, full. In the short run, redirecting Russian exports of oil to China, and elsewhere, will require shipping it by sea using tankers, or moving it by rail.
In the grand scheme of things, while capacity constraints on redirecting Russian oil exports are not trivial, they are hardly insurmountable. The bottom line is that boycotting the purchase of Russian oil will probably not hurt Russia all that much. For the same reasons, the very same factors that make a boycott of Russian oil exports ineffective at hurting Russia make the impacts of such a boycott very small for the Western allies. Once the oil hits the international market it limits the effect of the boycott on world oil prices. My own take is that boycotting Russian oil exports is probably worth trying. At worst, it will have relatively little impact on world oil prices, but it will impose some costs on Russia in the effort to circumvent it.
To the extent that it does work by preventing Russia from exporting some oil, it will increase world oil prices somewhat and that will have negative impacts in the U.S., Europe and elsewhere. I will address what we should and shouldn’t do to offset those impacts below.
Natural gas, while traded globally, is harder to redirect in the short run. Russia has a pipeline to China, which is probably full, but they have just entered a deal to construct a new one. The good news is that will take some time to build. (Although nowhere near as much time as it would take in the U.S. or western Europe to construct.) Russia has some capability to liquify natural gas for export by sea, but this, too, is presumably operating at capacity and will take some time to expand. A boycott of natural gas exports from Russia would, therefore, impose real short-term costs on Russia. Precisely because it would be effective it would also dramatically increase the cost of natural gas in Europe and elsewhere. Europe has some capacity to import more Liquified Natural Gas (LNG) but much of that excess capacity is in Spain, which is not linked by pipeline to the rest of Europe. The U.S., unfortunately, is currently operating at capacity in terms of its ability to export LNG. Higher natural gas prices in Europe will redirect available LNG supplies to Europe but there will be pain in Europe as a result of those higher prices. On balance, in my view, the pain for Russia of losing this source of revenue will be worth the pain of higher prices in Europe.
What should the U.S. do to offset the pain of higher oil and gas prices? There are some good policy options. Drawing down oil from the Strategic Petroleum Reserve and encouraging other countries to do likewise is absolutely appropriate. That is what these strategic reserves are for. We should also be using whatever leverage we have with Saudi Arabia to increase its oil exports. This should probably not be that difficult since the Saudi’s have a short term economic incentive to take advantage of these high oil prices and a long-term objective of not driving markets away from oil. We may be able to increase oil and gas production in the U.S. by lightening up on efforts to restrict that production (to achieve climate goals), but I am not sure this is quantitatively significant.
What we should not do is attempt to shield consumers from the impact of higher prices by lowering taxes on oil and gas. To do otherwise would be to effectively subsidize oil and gas consumption, which would be totally counterproductive.
If you agree or disagree, or you would like to add something on this issue, please submit a comment below.