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JOHNSON ON RUSSIA OIL PRICE CAP: MIT economist Simon Johnson, the former chief economist at the International Monetary Fund and the co-chair of the CFA Systemic Risk Council, is a top proponent of implementing a price cap on Russian oil to choke off Vladimir Putin’s war funding, and has discussed the idea with Ukrainian leadership.

Johnson spoke to Breanne about how the plan might work in an interview that follows, edited for length and clarity.

Breanne: How might this plan target Russia’s crude export revenues in ways that previous attempts—such as sanctions and outright bans on Russian oil—have not?

Johnson: The unfortunate reality is that today, at the end of June, Putin is pulling in almost the same daily revenue from oil that he earned before the invasion. In fact, if you look at what he earns from the EU; what he earns from selling to NATO countries, it's almost identical — it’s hardly changed.

Now, there have been some shifts in the composition of Russia's exports, there are more of them that are going to India and China, for example. But they're also quite robust to Western allies—[which] are, at the same time, of course, financing the military efforts of Ukraine to defeat Putin.

So basically, the stage on which this whole price cap discussion is taking place, is one in which the measures to date— while they have had effects—have not reduced Putin's revenue from oil.

So, what other ideas are there? That's absolutely the key question to ask. And the answer is that, in terms of international policy discussions, there's nothing else currently on the table that would put any dent in Putin’s revenues in the near-term.

Breanne: What are the biggest obstacles in trying to cap Russian crude prices?

Simon Johnson: Well, [leaders] do need to secure the support of the private sector in administering this, and making it work in an honest fashion. I think the indications there are quite positive, but there's still further discussions to be had.

And they do need to work out some of the details—such as exactly how much would be the price cap. And they need to talk to OPEC countries, because if Russia declines to export oil under the cap mechanism, then that will be a violation of its OPEC agreements. And there needs to be discussion with OPEC about what they would plan to do to make up the shortfall of production if Russia violates its quotas.

So there's a number of sort of technical and diplomatic pieces to fall into place. But there is already, I think, a pretty healthy dynamic that will move things forward on all those fronts.

Breanne: In implementing a price cap—what are the potential risks of setting it too high or too low? 

Well, we know that the marginal cost of production from existing Russian fields is between $4 and $6 … so you do want to set it above that. We also know that the Russians were happy to pump as much as they could, when the world oil price fell to $20 barrel in 2020—[during early] COVID impact, so we have that as another data point.

That suggests that you can set a price between $10 and $20 and the Russians will be willing to pump oil. Now, why would you want to give Putin an extra $10 a barrel, if you can get him to supply the oil at $10? That's one question. And if you offered $20 a barrel, maybe he'll shut in the oil anyway and violate his OPEC agreements, then you gotta go talk to OPEC.

So I think $10 seems like a pretty robust estimate, but there's no question that discussions are underway about exactly whether there's agreement on that point. But it does seem that allowing the Russians to recoup their costs and earn a couple of dollars per barrel, that strikes people as not unreasonable.

Read more from Johnson – on the downsides of the plan and the role that secondary sanctions might play – below…

Welcome to Daily on Energy, written by Washington Examiner Energy and Environment Writers Jeremy Beaman (@jeremywbeaman) and Breanne Deppisch (@breanne_dep). Email [email protected] or [email protected] for tips, suggestions, calendar items, and anything else. If a friend sent this to you and you’d like to sign up, click here. If signing up doesn’t work, shoot us an email, and we’ll add you to our list.

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MORE FROM JOHNSON…

Breanne: The plan is untested—what are some of the potential risks there?

Johnson: It is a new policy. I don't think we've seen anything quite like this before.

But there have been sanctions regimes on oil exporters previously. And those sanctions regimes always have some allowance or potential allowance for permitted exports that [are] permitted under some circumstances.

The closest parallel might be the Iraq oil-for-food program, in which at a certain point in the 1990s, Iraq was allowed to export oil. But the proceeds had to go into an escrow account, and then Iraq only received a fraction of those proceeds and how it used that fraction was supervised by the UN. … Now, that program had some problems … But I think the piece that was successful was that there was a licensing regime for permitted exports.

And the core idea, that everything is forbidden unless it's permitted, and it's permitted under circumstances that allow the oil to flow, in this case, at a low price—I think that builds on plenty of established precedent.

The second point I’d make, and of course I’m just speaking personally on all this—but if there is a lack of compliance or a deliberate attempt to undermine this, or deliberate efforts by any companies or countries to bolster the Putin regime with excessive financial transfers, I mean, [for example], China could offer to pay him $100 or $200 or $300 a barrel, that's their businesses as a matter of private contract. … But anything that becomes egregious in that context, given that the U.S. and the G7 has offered to let the oil flow, that I think is going to become increasingly a topic that will be linked in some quarters to the potential for the [application] of secondary sanctions.

Now, secondary sanctions are not popular with Europe … and there has been a great deal of reluctance to go there. And I think the U.S. has shown remarkable sensitivity and delicacy around that topic. But if you make people a reasonable offer, and you propose a structure that is highly conducive to continued economic growth and lower inflation than you would get otherwise, and then people reject that offer, or there are some people out there who deliberately act in a malevolent way to undermine such arrangement and to continue to finance terrorism — and let's face it, Russia is without question, a terrorist state, and it's the largest terrorist state in the world; the largest terrorist state in the history of the world—so through people who are deliberately propping up that regime with financial transfers, I think the question has to be asked: on what basis is that allowed to continue? And, that's a discussion that then becomes very closely linked to secondary sanctions.

A CASE FOR CONGRESS TO REFORM NEPA: A new policy paper out today from CRES Forum recommends that Congress step in and reform the National Environmental Policy Act to make reviews and permitting for new infrastructure more efficient — for the sake of gas pipelines and wind turbines alike.

The conservative energy policy group suggests that Congress act to streamline NEPA’s review processes, which have gotten longer on average since the law was first implemented in the 1970s and have ranged in recent years from between 1.3 and 10 years in duration, depending on the lead agency involved and the type of project.

The paper recommends Congress direct the White House’s Council on Environmental Quality to expand its list of projects, such as a replacement of existing infrastructure, that are eligible for categorical exclusions under NEPA. The categorical exclusion is a provision in the law that more or less allows agencies to issue a record of decision for a type of tried-and-true project without performing a full environmental review, having already determined that such projects don’t have a significant environmental impact.

Another recommendation is for Congress to ensure that resources appropriated to a given agency are utilized for the benefit of faster NEPA reviews.

“While funding technological innovation is meaningful, it can only prove effective if the resulting infrastructure can be readily permitted and constructed,” the paper says.

Ewelina Czapla, author of the paper, said NEPA reform is in the best interest of both liberal environmentalists, who want more renewable energy deployed, and oil and gas companies, which want more pipelines approved.

“In reality, everyone's really facing the same problem,” Czapla told Jeremy.

A situation characterized by multi-year reviews is “obviously not a trajectory that we should be on, if we intend on revitalizing our existing infrastructure,” Czapla said, “as well as adopting new innovative technologies that would already be posed with additional hurdles purely because of their novelty.”

SENATE DEMOCRATS SAY: NO NEW OFFSHORE LEASING: Senate Democrats have staked out a position on the Bureau of Ocean Energy Management’s proposed five-year program before its expected release tomorrow: no new lease sales.

Ten Democrats representing coastal states, including Foreign Relations Chairman Bob Menendez and Ed Markey of Massachusetts, urged Secretary Deb Haaland to help fulfill Biden’s campaign promises and ensure that the proposed program doesn’t enable new oil and gas development offshore by providing for no new lease sales.

Dems v. Dems: The ask represents the competing pressures facing the Biden administration, which has the power to shape the future of offshore leasing for the next half decade and must weigh political considerations disfavoring new leasing and drilling against the demands of the global energy crisis.

Environmentalists have criticized the administration for scheduling and carrying out any lease sales at all and asked for no new lease sales in the five-year program.

The oil and gas industry naturally wants a program with lease sales and has argued the tardiness of the new proposed program compromises its viability and the security of U.S. energy supplies.

Some congressional Democrats have also gone on record supporting more offshore leasing, with particular reference to the war in Ukraine and the disruption to global energy markets, and asking for the administration to speed up its authorization of the new five-year program.

What we’ve seen: Biden is under immense pressure from environmentalists to deliver on his promise to end offshore drilling and his broader climate change agenda, which has floundered in the face of slim congressional majorities, court rulings, and compromises supporting fossil energy he’s had to make since the war in Ukraine began.

The administration’s political preferences align clearly with limiting new oil and gas leasing, as evidenced by Biden’s leasing pause and the scaling down of acreage eligible for leasing onshore, as well as the legal battles it’s decided to fight.

It appealed U.S. District Judge Terry Doughty’s ruling enjoining Biden’s leasing pause, while it declined to appeal Judge Rudolph Contreras’s January ruling that tossed the lone offshore lease sale BOEM carried out last year.

EU AGREES TO END SALES OF ALL NEW COMBUSTION ENGINE VEHICLES BY 2035: Environment ministers from all 27 EU member states agreed on draft legislation yesterday to ban the sale of all new combustion engine vehicles by 2035, throwing their support behind the European Commission’s proposal as it works to finalize its “Fit for 55” greenhouse gas-reduction package.

The deal came after roughly 16 hours of negotiations in Luxembourg. “A long but good day for climate action: The council’s decisions on Fitfor55 are a big step towards delivering the EU Green Deal,” EU climate policy chief Frans Timmermans said on Twitter.

"The climate crisis and its consequences are clear, and so policy is unavoidable," Timmermans told reporters at a press conference following the negotiations.

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Calendar

THURSDAY | JUNE 30

11:30 a.m. The House Energy and Commerce Subcommittee on Environment and Climate Change will convene for a hearing on the state of the U.S. recycling efforts and proposed solutions to help repair it.