The mere threat that the US might go it alone and ban imports of Russian oil caused the oil price to soar to its highest levels in 14 years. The US only accounts for less than 3 per cent of Russia’s oil exports, however, so why did the price respond so dramatically?
Despite the most severe financial sanctions ever imposed on a major economy, the Americans and Europeans have left Russia’s oil and gas exports alone, so far.
Those exclusions are due to their concerns about the impact on international prices and inflation and, more particularly, what it would do to European economies that are dependent on Russian oil and gas for their energy.
The European Union imports about 45 per cent of its gas and 25 per cent of its oil from Russia, so banning those flows would result in an energy crisis – rocketing prices and severe shortages – and, inevitably, economic distress.
Stagflation – soaring inflation rates coinciding with a recession – would be likely in Europe and the consequences for the rest of the world would be unpleasant, at least.
The impact on Russia, however, would be even worse. The financial sanctions have already caused the value of the rouble to collapse and cut the economy off from most international trade and commerce other than energy sales. Its banks are in crisis and the country faces hyperinflation and a deep recession, bordering on a depression.
Cutting off the revenue from its energy sales, which account for nearly half its government’s revenues, would be ruinous. It would, incidentally, also undermine its ability to wage the war in Ukraine.
The Biden administration is under pressure from Congress to target Russia’s oil and gas exports and has been discussing the options with an understandably reluctant European Union.
It was comments by US Secretary of State, Antony Blinken on Sunday, that ignited the oil market. Blinken said the US and its allies were considering a ban on Russian oil imports. He wouldn’t rule out the US going it alone.
Despite being the world’s largest oil producer and a major exporter of oil and gas the US, because it consumes so much energy (more than 17 million barrels of oil a day), is a net importer of oil to the tune of about 8.5 million barrels a day.
The majority of that comes from Canada but it imports about 210,000 barrels a day of Russian oil and about 500,000 barrels a day of other products, like fuel oil and distillates, that it doesn’t produce itself.
In the context of Russia’s 10 million barrels a day of oil production and more than seven million barrels a day of oil exports, the US purchases are almost immaterial.
The West’s sanctions are, however, having some significant impacts on Russia’s energy exports even though they were specifically excluded from those measures to try to protect the Europeans.
There are estimates that as much as half of Russia’s exports, and perhaps more, have been frozen by the unwillingness of buyers and traders to buy it, or shipping companies to ship it, either on moral grounds or, more likely, because they and their financiers are concerned about being unwittingly caught up in the maze of financial sanctions.
While the steepness of the oil price rise (it was just above $US90 a barrel before the invasion after starting the year below $US80 a barrel) might seem to compensate Russia for the reduced export volumes, that’s not quite the case.
Shell recently generated controversy and criticism when it bought a cargo of 100 metric tonnes of Russia’s flagship Urals oil. The price it paid was the equivalent of a record discount of $US28.50 a barrel to the international market price for Brent crude.
That trade was revealing. Russia is losing significant volumes of oil exports but isn’t reaping anything close to the full benefit of the higher prices.
The “voluntary” sanctioning of Russian exports is impacting a global oil market that was already very tight even before the invasion.
OPEC – and its associates, like Russia -- cut back their production heavily in 2020 in response to the impact on demand of the pandemic.
As the worst of that impact passed, the cartel members decided to increase their output by a combined 400,000 barrels a day each month but have struggled to achieve that target, partly because of the big slump in investment during the pandemic.
The White House has been urging OPEC, and Saudi Arabia in particular, to add more supply to dampen the prices rises and offset the impact of any sanctions on Russian oil but, whether they are reluctant to help sanction another major producer with whom they’ve coordinated global supply or aren’t physically able to pump more oil, so far they’ve stuck to their existing plan of incremental increases.
The Biden administration has also been talking to both Iran and Venezuela about lifting, or lightening, US sanctions on their economies in exchange for increased oil production.
Iran’s oil output has been heavily constrained by sanctions against it because of its nuclear program and Venezuela’s by US attempts to undermine the Maduro regime.
The Biden administration has been trying to revive the 2015 deal with Iran that Donald Trump blew up in 2018, which would clear the way for Iran to produce and sell about 1.2 million barrels a day more oil than it does today. Venezuela only produces about 800,000 barrels a day now but, before it was sanctioned, produced about three million barrels a day.
Putin might win the battle in Ukraine but ... the loss of Russia’s remaining oil and gas revenues would mean losing the economic war and the destruction of what’s left of its economy.
While it might take quite some time for more oil to flow – Venezuela’s run-down industry would probably require significant investment – the countries could help offset the losses of Russian volumes from the global market and make it less daunting for Russia’s biggest customer, the EU, to stop buying its oil.
Russia, if its energy sector is sanctioned, could divert its oil exports to India or China but their high sulphur content means refineries would have to be reconfigured to handle it, limiting the volumes the likely customers could accept, particularly in the near term.
Gas, which it pipes into Europe, would be even more problematic, given that replacing Europe as a customer would require construction of gasification plants and export terminals to ship LNG to the likely customers in Asia.
Russia could cut off gas supplies to Europe itself – it has threatened to do so in retaliation for the EU’s decision not to approve the operation of the $US11 billion ($15 billion) Nord Stream 2 pipeline from Russia to Germany – but that would cut off its only meaningful source of foreign exchange revenue and greatly exacerbate its economic stresses.
It would be truly devastating – and a clear signal of Vladimir Putin’s desperation. He might win the battle in Ukraine but, whether he cuts off the supply or the West slashes the demand, the loss of Russia’s remaining oil and gas revenues would mean losing the economic war and the destruction of what’s left of its economy.