HOUSTON — Before its forces invaded Ukraine, Russia supplied one in every ten barrels of oil the world consumed. But while the United States and other customers shun Russian crude, the global oil market is facing its biggest upheaval since the Middle East tumult of the 1970s.
An energy price shock is likely to last as long as the confrontation continues, as there are few alternatives to quickly replace Russia’s exports of around five million barrels per day.
Oil prices quickly soared as the global economy emerged from the Covid-19 shutdowns and producers scrambled to meet growing demand. International oil companies had cut investment in the past two years.
Now, traders are bidding for crude oil prices at levels not seen in years, expecting Russia — one of the top three oil producers, along with the United States and Saudi Arabia — to be sidelined. With the announcement of the US embargo on Tuesday, prices are likely to rise further, energy analysts say.
“We are catastrophically tightening,” said Robert McNally, a former energy adviser to President George W. Bush. “What we need now are countries that are producing more oil.”
That won’t be easy. Only Saudi Arabia, the United Arab Emirates and Kuwait have spare capacity, together just over 2.5 million barrels per day. Venezuela and Iran could contribute about 1.5 million barrels per day to the market, but that would require the lifting of US sanctions against those countries. And the United States could increase production by more than a million barrels a day — but it would take a year to achieve this, and oil companies would need to deploy more manpower and equipment.
There have been few comparable oil supply disruptions. The Iranian Revolution of 1978 took an estimated 5.6 million barrels per day from the market, while the 1973-74 embargo by Arab members of OPEC and the 1990-91 Persian Gulf War removed 4.3 million barrels.
A glimmer of hope came from Venezuela this week when President Nicolás Maduro said he would talk to his domestic opposition and then release at least two Americans imprisoned in his country. It was apparently in response to a weekend visit by Biden administration officials to discuss the lifting of sanctions imposed by Washington in 2019 over election fraud, human rights abuses and its close relations with Iran, Russia and China.
But Venezuela’s oil industry, one of the world’s strongest 30 years ago, is a mess. Its pump jacks and refineries are rusting and it can barely fuel its own people. The national oil company will need billions of dollars in investment to return to the market as a major exporter.
Negotiations with Iran to revive the 2015 nuclear deal and open the taps of Iranian exports only seemed imminent a few days ago. But a demand from Russia for a written guarantee from the United States that Western sanctions against Russia will not hinder Russia’s trade with Iran has cast doubt on the talks.
Should the stalemate be broken, Iran will have several hundred thousand barrels of oil stored on tankers that can be shipped immediately. After that, it could add a million barrels per day of production.
Perhaps 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 group that includes Russia. The Deputy Prime Minister of Russia, Alexander Novak, is the co-chair. The expanded cartel has been reluctant to expand production beyond a modest increase of 400,000 barrels per day scheduled for April.
Saudi Arabia is the largest producer of OPEC and OPEC Plus, but the kingdom’s relations with the United States are tense. Any break with Russia will require a decision from Crown Prince Mohammed bin Salman, who has fallen out of favor in Washington after he was accused of ordering the murder of Jamal Khashoggi, a columnist for The Washington Post.
US officials say they are hopeful that Saudi Arabia and other producers in the Middle East will increase production.
“We are in constant dialogue with those countries and we continue to ask them to do what they can to help the situation,” Jose W. Fernandez, secretary of state for economic growth, energy and the environment, said in an interview. “These are long-term allies.”
“We are going to feel some pain,” Fernandez added. “We and our European allies will not be immune to the pain. At the same time, we have taken these actions in conjunction with our allies.”
OPEC Secretary General Mohammad Barkindo met with US oil producers on Monday at the CERAWeek energy conference in Houston, but in comments to reporters offered little prospect of the cartel easing market pressures.
“There is no capacity in the world” that could replace Russian production, he said, adding that “we have no control over current events, geopolitics, and this sets the pace of the market.”
The United States imported about 700,000 barrels of crude oil and petroleum products from Russia last fall, or about 3 percent of US consumption, US officials say. Since then, the quantities have decreased.
But oil prices – which ultimately determine gasoline and diesel prices – are set worldwide. All supplies the United States imports to replace Russian barrels — be it from Colombia, Brazil, Canada or Mexico — are barrels taken from a market that has already stretched.
Britain said Tuesday it would phase out Russian oil imports by the end of the year, and other European countries — much more dependent than the United States on those supplies — are under pressure to take similar measures. International banks, shippers and insurance companies are hesitant to make 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 refineries are concerned that sanctions will block the supplies of supplies they buy.
The war between Russia and Ukraine and the world economy
Last week, Britain banned Russian-owned ships sailing Russian flags from its ports, and the European Union is considering a similar action that could affect 130 tankers, according to Kpler, a commodities data analysis company.
Next year, new production will come from fields being developed in Canada, Brazil and Guyana. But that will not immediately bring relief to the pump.
China could be the wild card. With inventories depleted and domestic oil production declining, China could take more Russian oil — perhaps most of the combined four million barrels a day of US and European imports, Goldman Sachs estimates — at a steep discount.
China will have to decide how closely it wants to align with Russia. But if it buys more Russian oil, it could cut imports from the Middle East, effectively freeing up those supplies for Europe and the United States. It would take weeks, if not months, to divert shipping traffic.
On the demand side, US and foreign consumers are likely to drive less if fuel prices remain high.
US producers have doubled production in the past decade with shale fields across the country and drilling in the Gulf of Mexico. But they cut investment as the pandemic undermined energy demand, climate change concerns grew and investors demanded that the companies return more money to shareholders.
Thousands of oil workers have been laid off or left the industry in the past three years. There is also a shortage of sand for drilling through hard shale to collect oil stored in the rocks.
Executives are also reluctant to drill more because as they rushed to do so over the past few decades as prices rose, the market often collapsed, turning booms into busts.
The United States produces just under 12 million barrels of oil per day, about 60 percent of national demand, and it is now an exporter of both oil and natural gas. (The imports and exports are not completely interchangeable because oil grades are suitable for different domestic and foreign refineries.) The Energy Department on Tuesday forecast that daily U.S. production would average 12 million barrels this year and rise to 13 million barrels per day by 2023. That would be 700,000 barrels above the record 12.3 million barrels in 2019, a small increase in a global market of 100 million barrels per day.
About 4,000 wells have been drilled, but not yet completed with hydraulic fracturing. Halliburton and other service companies are nearing capacity and will take months to get to all those wells. For new wells, oil does not begin to flow until six months after a drilling rig is deployed.
Still, some companies can be expected to produce more to take advantage of high prices.
“While the big companies are not going crazy and staying on track,” said Trent Latshaw, chief executive of Latshaw Drilling, which operates rigs in Texas and Oklahoma, “the private equity guys will see increased activity from them. One hundred dollars a barrel oil, even $90 oil, is a boon to them.”
Private equity firms have replaced oilfield investment funds and banks as they start up small companies and then redirect them to larger companies looking for more acreage, mostly in Texas, New Mexico and North Dakota. Small producers, responsible for about a tenth of US production, are also planning to pump more.
“Everything I have is running at full throttle,” said Darlene Wallace, chief executive of Columbus Oil Company, an Oklahoma operator with 25 oil wells. Ms. Wallace said she withheld a $100,000 investment to repair a well, but that’s about to change.
“If oil is $60, I’m not going to do that, but I’m almost ready to put the work into it,” she said. “For $100 a barrel I can put that sucker back to work.”
