Did the US inadvertently finance Putin’s war on Ukraine with short-sighted, politically motivated, and irrational energy and climate policies? And did those failed policies fuel inflation to the obscene rate of 7.87%? Were the geopolitical consequences and the enormous economic costs of those policies predictable and avoidable? The short answers are yes, yes, and yes. Anyone in the Biden Administration could have “done the math” and seen how rising energy prices would continue to fill Putin’s coffers, funding his military build-up, and contribute to runaway inflation here at home.

The oil and gas industry is the cornerstone of the US economy and will continue to be for years to come. Crude oil and natural gas prices impact not only the price of gas at the pump but virtually everything we buy. Petroleum is an ingredient in all types of consumer goods, which are then transported using ships, planes, trains, and trucks fueled with petroleum products. Natural gas powers over 40% of our electrical grid, heats our homes, and is a substantial component in the cost of manufacturing almost everything.

Crude oil and natural gas prices also impact the economic health and behavior of global adversaries like Russia and China. Russia is one of the top three largest oil and natural gas producers in the world. According to the Russian Ministry of Finance, oil and natural gas export revenues constituted 36% of their total federal revenues in 2021. That amounts to over 9 trillion rubles or $121 billion in 2021 alone. Russia sold 48% of its oil and 72% of its natural gas production to European countries.

By contrast, in 2021, America bought only 1% of Russia’s crude oil and none of their natural gas in 2021. 1% doesn’t sound like much but it does amount to 245 million barrels and over $16 billion in revenue to Russia (@$65/barrel average). But our imports of Russian crude are only a small part of the story.

The real story of how Putin financed his war on Ukraine is about the rapidly rising price of crude oil and natural gas over the past several years. If the market price of oil and natural gas had remained relatively stable, Russia would only have made modest profits on its fossil fuel exports. As prices rose, Putin began making a killing and is using those windfalls to build and maintain his war machine.

Russia’s total cost (excluding taxes) of crude oil production is estimated to be between $32 and $44 per barrel. In 2019, the average price for crude was about $60 per barrel. Assuming a production cost of say $40 per barrel, Russia earned a profit of $20 per barrel. But when the average price reached $100 per barrel, their profits triple to $60 per barrel. For reference, Russia’s baseline oil production rose to 11.5 million barrels per day in 2021 and they exported 4.7 million barrels per day.

This translates to a total of 1.7 billion barrels exported in 2021 alone (4.7 x 365). A reasonable crude oil price of $60 per barrel and a profit of $20 per barrel nets Russia $34 billion per year. When crude is over $100 as it is today, Russia makes $60 a barrel and a whopping $102 billion per year! That’s a $68 billion windfall ($102-$34), simply because the US allowed the market price of crude to become artificially and unnecessarily high.

Image: Oil drill at night by kotkoa. Freepik license.

The situation with natural gas is even more dramatic. In 2021, Russia exported 8.9 trillion cubic feet of natural gas. The average production cost of dry natural gas in the US is about $3 per thousand cubic feet and Russia’s production cost is thought to be even lower. In 2019, the US average export price of dry natural gas was about $3.60 per thousand cubic feet (CFM). In 2021, the average price was about $5.85, a 63% increase in two years. The average monthly price of Russian dry natural gas in 2019 was about $3.22/CFM and it skyrocketed to an average of $10.79 in 2021, an increase of 335%!

That amounts to another Russian export windfall of $7.57/CFM or about $68 billion in 2021 ($7.57 x 8.9 billion CFM). Added together, these oil and natural gas revenue windfalls to Russia are $136 billion in 2021 alone and are certain to exceed that number in 2022.

In early 2020, and in plain sight, Putin, along with OPEC+, helped lay the groundwork for dramatically increasing the price of oil and natural gas after prices had plummeted to $20 per barrel in the early days of the pandemic. According to the US Energy Information Administration, that’s when Russia “began actively coordinating oil production with a number of OPEC and other non-OPEC producers, collectively known as the OPEC+ agreement. The OPEC+ agreement aimed to curb crude oil production in response to rapidly declining demand resulting from the COVID-19 pandemic.”

The writing was on the wall, but the Biden Administration continued to create obstacles for our fossil fuel industry while providing huge subsidies for so-called “renewable” energy projects. For example, the trillion-dollar infrastructure bill contains billions for wind and solar energy and electric vehicles but not a dime for ensuring that the sources of energy upon which our entire existence depends, oil and natural gas, remained plentiful and economical.

During that early 2020 exercise in global oil price manipulation, Putin learned two things: 1) It’s better to cooperate with OPEC to sell less oil and drive prices much higher than to continue to sell more oil in a price war with the Saudis he can’t win. 2) Low oil prices coupled with misguided US energy and climate policies will force US oil producers to cap unprofitable wells, curtail shale oil production, and limit new investment in production and exploration.

His plan worked; oil and natural gas prices rose quickly in response to the worldwide shortage. It was clearly a solid financial strategy given US energy and climate policies and Europe’s total dependence on Russian energy. Sadly, those energy revenue windfalls gave Putin a huge long-term source of cash with which to build his military and fund his war on Ukraine.

How do we stop funding Putin’s wars and start getting our domestic energy costs permanently under control? The answer is a coherent, long-term energy policy designed to eliminate oil imports and dramatically increase oil and natural gas production and exportation.

First, we expand exploration and drilling on federal lands, speed up project approvals, and eliminate unnecessary EPA restrictions. Second, we enact new tax incentives for oil and gas exploration and production, including expanding existing operations. Third, we enact federal price supports for crude oil and natural gas like those used to support agricultural commodities. We set a floor for the price of oil and natural gas below which the government will pay producers to continue to produce even if global prices are lower. Fourth, we enact price limits on oil and natural gas that we consume domestically.

In other words, in return for price supports and tax incentives, producers will be required to sell oil and natural gas to domestic refiners and natural gas distributors at or below a price threshold. This will ensure that domestic prices for gasoline, diesel fuel, jet fuel, marine fuel, and natural gas remain relatively stable and affordable to both industry and consumers.

Fifth, and finally, we pay for these price supports and tax incentives by levying a tax on oil and natural gas exports that are sold above a certain price threshold. In other words, Uncle Sam shares industry profits in good times in exchange for supporting the industry during the bad times.

This new energy policy will encourage investment in new exploration and production and will immediately enable existing producers to untap existing wells and expand existing shale oil production without fear of market prices falling below breakeven thresholds. Such a policy is a matter of national security and is essential to the long-term economic health of our nation.

Jerry Korth is an engineer and entrepreneur having founded several small high-tech businesses. He is currently working on a green energy project to convert waste motor oil into low sulphur marine diesel fuel. Email: jerry.korth@prsmip.com.