Loss of Russian Oil Leaves a Vacancy That Isn’t Easily Filled, Stressed Markets
HOUSTON – Before its army’s invasion of Ukraine, Russia consumed one in every 10 barrels of oil in the world. But as the United States and other customers abandon Russian crude, the global oil market is facing its biggest turmoil since the Middle East turmoil in the 1970s.
As long as the conflict continues, the energy price shock will likely last, as there are few options to quickly replace Russia’s exports of about five million barrels a day.
Oil prices were already rising sharply as the world economy emerged from the Covid-19 shutdown and producers stretched to meet rising demand. International oil companies had cut investments in the last two years.
Now traders are bidding up crude prices at levels not seen in years, hoping that Russia – one of the top three oil producers along with the United States and Saudi Arabia – will be sidelined. Energy analysts say prices are likely to rise further with the announcement of US sanctions on Tuesday.
“We are tightening up disastrously,” said Robert McNeely, a former energy adviser to President George W. Bush. “What we need right now is countries are producing more oil.”
It will not be easy. Only Saudi Arabia, the United Arab Emirates and Kuwait have spare capacity, with a little over 2.5 million barrels per day. Venezuela and Iran could contribute about 1.5 million barrels a day to the market, but that would require lifting US sanctions against those countries. And the United States could increase production by more than a million barrels a day — but doing so would take a year, and would require oil companies to use more manpower and equipment.
There have been few comparable disruptions in oil supply. The Iranian Revolution of 1978 took an estimated 5.6 million barrels a day from the market, while the 1973–74 sanctions by Arab members of OPEC and the Persian Gulf War of 1990–91 removed 4.3 million barrels.
Venezuela received a glimmer of hope this week as President Nicolas Maduro said he would speak with his domestic opposition and then released at least two Americans imprisoned in his country. It was apparently a response to a weekend visit by Biden administration officials to discuss election fraud, human rights violations and the lifting of sanctions imposed by Washington in 2019 over their close ties with Iran, Russia and China.
But 30 years ago, Venezuela’s oil industry, one of the strongest in the world, is in shambles. Its pump jacks and refineries are rusting, and it can hardly supply fuel to its people. Its national oil company would need billions of dollars in investment to return to the market as a major exporter.
Talks with Iran to revive the 2015 nuclear deal and open taps for Iranian exports appeared imminent just days ago. But Russia’s demand for a written guarantee from the United States that Western sanctions on Russia would not hinder Russia’s trade with Iran has cast doubt on the talks.
Should the impasse be broken, Iran has several million barrels of oil stored on tankers that can be shipped quickly. After that, it could add up to a million barrels of production a day.
Potentially more important are Saudi Arabia, the United Arab Emirates and Kuwait, traditional allies of the United States and members of the Organization of the Petroleum Exporting Countries.
But they are also in a loose alliance called OPEC Plus, a grouping that includes Russia. The Deputy Prime Minister of Russia, Alexander Novak, is the co-chair. The expanding cartel has been reluctant to expand production beyond a modest 400,000-barrel-day increase set for April.
Saudi Arabia is a major producer in OPEC and OPEC Plus, but the kingdom’s relations with the United States have been strained. Any break with Russia would require a decision by Crown Prince Mohammed bin Salman, who has fallen out of favor in Washington after being accused of ordering the murder of Jamal Khashoggi, a Washington Post columnist.
US officials say they expect Saudi Arabia and other producers in the Middle East to increase their production.
Jose W. Fernandez, the Under-Secretary of State for Economic Development, Energy and Environment, said: “We are in constant dialogue with those countries, and we ask them to do whatever we can to help the situation.” Huh.” an interview. “These are long-term allies.”
“We’re going to feel some pain,” Mr. Fernandez said. “We and our European allies are not going to be free from pain. At the same time, we have taken these actions with the cooperation of our allies.”
OPEC Secretary General Mohamed Barkindo met with US oil producers at the CERAWeek energy conference in Houston on Monday, but in comments to reporters he offered little chance the cartel would relieve market pressure.
“There is no capability in the world” that can replace Russian production, he said, adding that “we have no control over current events, geopolitics, and it is determining the momentum of the market.”
US officials say the United States imported about 700,000 barrels of crude and petroleum products a day from Russia, or about 3 percent of US consumption. The volume has declined since then.
But oil prices – which ultimately determine gasoline and diesel prices – are set globally. Any supply the United States imports to replace Russian barrels—whether from Colombia, Brazil, Canada or Mexico—barrels is an already expanding market.
Britain said on Tuesday it would phase out Russian oil imports by the end of the year, and other European countries – far more dependent than the United States on those supplies – are under pressure to take similar action. International banks, shippers and insurance companies are shying away from making deals with Russia. BP, Shell and Exxon Mobil have decided to suspend major operations there.
Shippers fear for the safety of their tankers sailing in the Black Sea, and refiners are concerned that the embargo will prevent delivery of the supplies they have purchased.
The Russo-Ukraine War and the Global Economy
Britain last week banned Russian-owned and Russian-flagged vessels from its ports, and the European Union is considering similar action, which could affect 130 tankers, according to commodity data analytics firm Kepler. could.
By next year, new production will start arriving from fields being developed in Canada, Brazil and Guyana. But this will not give immediate relief to the pump.
China can be a wild card. With dwindling inventories and declining domestic oil production, China may be taking in more Russian oil – perhaps most of the combined four million barrels of US and European imports, Goldman Sachs estimates – at a steep discount.
China will have to decide how closely it wants to engage with Russia. But if it buys more Russian oil, it could reduce imports from the Middle East, effectively freeing up those supplies for Europe and the United States. Redirecting shipping traffic will still take weeks, if not months.
On the demand side, US and foreign consumers will probably cut back on their driving if fuel prices remain high.
American producers have more than doubled their output over the past decade with drilling in shale fields across the country and in the Gulf of Mexico. But they cut investments as the pandemic slashed energy demand, raised concerns over climate change, and investors demanded that companies return more cash to shareholders.
Thousands of oil workers have been laid off or left the industry over the past three years. There is also a lack of sand to puncture the hard shale to capture the oil deposited in the rocks.
Executives are also reluctant to drill more because when they rushed to do so, with price increases in recent decades, the market often crashed, converting the boom to bust.
The United States produces just 12 million barrels of oil a day, about 60 percent of national demand, and is now an exporter of both oil and natural gas. (Imports and exports are not completely interchangeable because grades of oil are adapted to different domestic and foreign refineries.) The Energy Department predicted Tuesday that daily U.S. production will average 12 million barrels this year and a day in 2023. will increase to 13 million barrels. This would be 700,000 barrels more than the record 12.3 million barrels in 2019, a small increase over the global market of 100 million barrels a day.
Roughly 4,000 wells have been drilled but are yet to be completed with hydraulic fracturing. Halliburton and other service companies are operating close to capacity and will need months to reach all those wells. For new wells, oil does not begin to flow until six months after the rig is installed.
Nevertheless, some companies can be expected to produce more to take advantage of higher prices.
“While the big companies aren’t going to go crazy and stay the course,” said Trent Latshaw, chief executive of Latshaw Drilling, which operates rigs in Texas and Oklahoma, “private equity guys, you’ll see increased activity from them. A hundred dollars a barrel of oil, even $90 worth of oil, is a boon to them.”
Private equity firms turn to investment funds and banks in oil patches as they set up smaller companies and then turn them into larger ones, mostly in Texas, New Mexico and North Dakota looking for more acres. . Smaller producers, which account for about a tenth of US production, are also planning to pump more.
“Everything I have is up and running at full speed,” said Darlene Wallace, chief executive officer of Columbus Oil Company, an Oklahoma operator with 25 oil wells. Ms Wallace said she was holding off an investment of $100,000 to fix a well, but that is about to change.
“I’m not going to do it when oil is at $60, but I’m ready to work in it,” she said. “At $100 a barrel, I can put that sucker back to work.”
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