US President John F. Kennedy was apparently fond of the phrase “Don’t get mad, get even.” President Theodore Roosevelt had a different favorite: “Speak softly and carry a big stick.” Former President Joe Biden did both before leaving office on Monday. Consumers punished Biden and the Democrats for high-priced gasoline at the polls. In his last weeks in office, Biden responded by laying the ground for $4 per gallon gasoline as he imposed drastic sanctions on Russian oil exports. In doing so, he made use of a law that gives Congress the power to veto any attempts to remove the sanctions. This action could make it difficult for the Trump administration to lift the Biden measures, especially since many Republican politicians represent oil-producing areas that will benefit from the crude price rise caused by the Biden “disruption.” The global economy will slow, especially if the new president imposes his proposed tariffs. Oil and gas producers in the US and elsewhere will profit.
In one of its final acts, the Biden administration approved new sanctions on Russia on Jan. 10 that immediately shifted the oil market’s psychology. Some believe the action will have important longer-term effects on the market even as others think Russia will find ways around the restrictions. The sanctions are likely to lay the groundwork for much higher oil prices, especially given that new Treasury Secretary Scott Bessent endorsed them at his confirmation hearings. Their effects will likely be long-term because the Biden administration imposed the restrictions under a rule that requires Congress to approve any changes to them.
News of the sanctions prompted an immediate rise in crude prices. The sanctions will likely keep pushing prices higher, especially if Trump decides to also tighten existing Iran sanctions. No one should be surprised if oil-exporting nations jump in and limit production increases to give prices an even greater boost.
Biden’s Trap
The Biden administration laid a trap with the sanctions because neither Trump nor Bessent can relax them unilaterally, even if they wanted to. As the Financial Times explains: Under measures announced by the US Treasury, around 100 entities from the finance, energy and defense sectors are to be relisted under an unusual sanctions law that requires Congress be given 30 days to consider any delistings. The new authority will give legislators an opportunity to head off any attempts by the new White House to reverse the Biden administration’s efforts to weaken Russia’s military-industrial efforts. If both houses of Congress pass a “measure of disapproval,” delistings can be blocked.
President Biden also imposed “mandatory” secondary sanctions on companies that knowingly facilitate significant transactions for or on behalf of sanctioned Russian firms. In effect, these rules electrify a “third rail” that could cut off access to US financial or international banking systems if trading companies or oil buyers have indirect commercial dealings with the sanctioned shipping companies or oil producers, the FT suggests.
However, the sanctions may not need to be “Trump-proof” because members of the new administration have publicly advocated for stronger sanctions on Russia’s energy sector, researchers at Columbia University’s Center on Global Energy Policy note.
Market Impacts
China and India are the nations most affected by the sanctions. The impact on China may, however, be minimal because petroleum demand there is already slowing — and may indeed be peaking — while it can also draw on strategic crude oil stocks.
Many in the oil industry dispute the view that China’s oil demand is peaking, asserting that it will continue to grow. However, that growth will not occur in the near term, given the nation’s bleak economic outlook. Indeed, it will decline slightly in 2025 to 4.6% from 5% in 2024, according to the International Monetary Fund, which released its most recent forecast on Jan. 17.
India’s situation differs. Its economy was already confronting a slowdown. Foreign investors have been leaving India since 2023, and inflation in food prices has cut into consumption. Higher oil prices will make matters worse, with India’s economy seen by many as significantly vulnerable to fluctuations in oil prices. By one estimate, a 10% oil price increase would prompt a GDP decline of around 3%. Projections for India’s economic growth and oil consumption must be revised if prices remain high, which is a real possibility.
Payment Freeze
Unwillingness on the part of banks to participate in trades involving Russian oil may strengthen the sanctions’ impact and frustrate the traders who have managed to move Russian crude.
The banks’ reluctance may force refiners in India to find new sources for up to 800,000 barrels per day of oil. India’s government will also not allow dealings with US-sanctioned oil tankers or entities, a senior government official was reported as saying at a recent industry event in Delhi. Indian refiners are concerned, too, about whether banks will process payments for cargoes carried on these sanctioned tankers — and may instead need to turn to exporting nations in West Africa, such as Nigeria, for that oil.
Chinese buyers of Russian crude face similar problems. Port authorities in Shandong have banned sanctioned tankers from entering, while reports also suggest that Chinese banks are increasingly unwilling to underwrite cargo transactions in any denomination.
Refiners Surprise
The Biden sanctions caught US refiners and marketers unprepared. Refiners likely allowed crude, and perhaps even product inventories, to fall as 2024 ended because they anticipated a continued increase in the global market crude surplus.
They may have been swayed in this by the International Energy Agency’s forecasts released in early December. The IEA said then that its current market balance still indicates a 950,000 b/d supply surplus next year, even though the decision by Opec countries and its allies to delay production hikes has materially reduced the potential overhang. If Opec-plus begins unwinding voluntary cuts from the end of March as planned, the surplus would increase to 1.4 million b/d.
Price Impacts
Oil prices have climbed on the news of Biden’s new sanctions, with Dated Brent closing at $78.62 per barrel on Jan. 23. Whether the price increases persist will depend critically on Opec-plus, which has resisted raising production, with a few key members, particularly Saudi Arabia, making extra reductions to their exports and production.
Opec-plus members may not announce an output increase when the next opportunity to do so arises. They may instead choose to let the Biden-induced cuts in Russian production reduce crude oil stocks. The argument for this is simple: lower inventories relate to higher prices, a result sought by all oil producers. It would not be surprising, then, if oil-exporting nations take advantage of the opportunity being offered to reduce stocks and raise prices.
Philip Verleger is an economist who has written about energy markets for over 40 years. A graduate of MIT, he has served two presidents, taught at Yale and helped develop energy commodity markets since 1980. Kim Pederson is the editorial director of PKVerleger LLC. The views expressed in this article are those of the author.