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Can the allies block Russia's biggest export? Could the world do without Russian oil?
Listen up.
There is a lot of talk lately about natural gas because of Europe's extremely high dependence
on it, but the truth is that Russia is first and foremost a huge oil exporter.
To give you an idea, in 2021, Russia exported crude oil and oil derivatives – gasoline, diesel,
kerosene, semi-refined, etc., etcetera – worth approximately $180 billion. This is more than
three times more lucrative than its natural gas exports, for which it earned about $55 billion.
During 2021, every day of the year, Russia exported on average about 4.5 million barrels
of crude oil and about 3 million barrels of refined products. These quantities made it
the world's second largest exporter of black gold, behind only Saudi Arabia.
Incidentally, 70% of all its crude oil exports went to Europe and the United States.
And VisualPolitik viewers, this is the oil that the United States has put in
its sights to complete the breaking of the battered Russian economy.
And I stress this because there is often a lot of confusion on this point. In the
media it is sometimes said that blocking or embargoing Russian oil would mean needing
to find an alternative source capable of supplying the world with about 11
million barrels a day. But that is not true.
Russia produces around 11 million barrels of oil every day, but a large part of it is used
for domestic consumption. What’s more, in order to deal a severe blow to its economy
it would not even be necessary to replace all its oil exports; just taking part of them out
of the market would be enough. Keep in mind that almost 40%
of all Russian government revenues depend directly on oil and gas exports.
In any case, the point is that, now, the war has changed everything.
You see, initially the sanctions imposed on Russia excluded the energy sector,
including the banking operations that allow buying and selling of this commodity to be carried out.
This is the case, for example, of Gazprombank, the country's third largest lender, which is
also in charge of managing the transactions of Gazprom, the Russian gas giant. Well, this bank
has not been excluded from the Swift system, nor has it been restricted from dollar transactions.
However, many banks, refineries, oil companies and shipowners reacted to the invasion and the
resulting international sanctions by refusing to carry out any operations with Russian entities.
Whether it is because of reputational risk, the fear that the sanctions will end up tainting them,
or that the sanctions will be extended and not allow them to collect their bill,
the fact is that the invasion of Ukraine turned Russian oil into a toxic product.
This helps explain news stories like this one. (8 March 2022: Shell to stop buying
Russian oil and gas. FT) And there’s more. According to
data from several energy consultancies, after the military storm erupted,
about 70% of Russian oil began to have problems finding a buyer.
The outcome? After invading Ukraine, Russian oil exports could have plummeted during the
first weeks of March by 35% in the case of crude oil and about 50% in
the case of processed products. We are talking about approximately 1.7
and 1.3 million fewer barrels per day. In addition, the rejection of Russian oil
has meant that it has to be sold more cheaply. For example, it is estimated that oil from the
Urals is being placed on the market with discounts of more than $25 per barrel.
And that is not all. If the war and the cycle of sanctions continue, the real risk for Russia,
according to the Oxford University Institute for Energy Studies,
is that its exports will be further reduced. According to the estimates of this Research
Center we could be talking about between 3.2 and 4 million barrels/day. That is, approximately 50%
of exports, taking into account both crude oil and processed products.
That would be a huge blow to the Russian economy. It could even force Russia,
in the absence of storage capacity, to reduce production by shutting down wells. This could be
devastating: keeping in mind that it is not at all easy to restart production from a closed well.
Of course, it may also happen that, in the face of the lack of global supply,
Russia finally would manage to sell its oil, albeit at heavily discounted prices.
In that case, let's say that the blow would be significant but not so devastating.
Precisely for this reason, the allies, and above all the US government,
are scrambling to find ways to increase world oil production as quickly as possible.
And that is what explains headlines like this one:
(White House tells oil industry 'we need more' as fuel prices
soar. Energy secretary says nation on 'war footing' while
Colombia warns on Venezuela overture. FT) It seems VisualPolitik fans, that the Joe
Biden administration is trying its best to find more oil. Because finding a new abundant supply
could allow the allies to push through the mother of all sanctions: an oil embargo on Russia.
An embargo, a blockade that even if it were limited to crude oil and not to processed
products, for example, would mean sending Russia back to the Middle Ages. It would be something
like checkmate for Vladimir Putin's regime. Now, the question is, how does the White
House think it can get that new oil supply? Is it really feasible? What could the consequences be?
We’re going to get into that soon, but first, first we have to give Joe Biden's economic
policy a slap on the wrist. Because following the invasion of Ukraine, the President of the
United States has had to take such a big swerve that his entire energy policy is in a tailspin.
Listen up.
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1(BIDEN'S BIGGEST STRATEGIC MISTAKE?)
Accelerate the energy transition to clean sources. This was the electoral promise that led Joe Biden
to place the oil industry in his sights. And no, no, don’t think that this time
the promises remained in the campaign rallies. Not at all.
As soon as Joe Biden arrived at the White House, he got down to work and
began issuing executive orders against the US oil industry one after another. In this way,
the new president wanted to make it clear that a new era had arrived in Washington.
And don't forget that we are talking about the
most important crude oil producer in the world. So it's no joke.
And so, on 20 January, Joe Biden signed an executive order halting
operations to exploit oil from the Arctic National Wildlife Refuge,
canceled authorization for the Keystone XL pipeline to bring in more and cheaper
oil from Canada, and ordered government agencies to research new regulations for
curbing oil consumption and emissions. Then, a little later, on 27 January,
another executive order established a moratorium prohibiting new leases
of federal lands and waters to search for and exploit oil. And take note, because nearly 25%
of all current and potential US production depends on fields located on federal lands or offshore.
And he wasn’t done with all that. He also ordered the interior secretary to look into ways to
increase royalties and taxes on oil companies at a time when other departments are trying to
reduce the capital and funding available to make new investments in fossil fuels. And,
obviously, if you cut available dollars you also make financing more expensive.
To make matters worse, since then, the granting of permits to carry out new exploitation or to
build new pipelines or access roads to the fields has also slowed down.
For example, where applicable, it takes federal authorities about 140 days
to approve a drilling permit. Texas authorities take only two.
VisualPolitik fans, this whole package of measures combined not only reduced the potential supply of
crude oil but above all sent a message loud and clear to the US industry: It is not worth
investing large amounts of money in the oil sector because the government will punish you.
And take note, because the United States is currently producing around 11.6 million
barrels/day. This is approximately 1.5 million barrels less than pre-covid production.
In other words, if the Biden Administration had not thrown a spanner in the works,
it is very likely that we would be seeing much lower oil prices today. Remember,
those 1.5 million barrels are equivalent to more than 30%
of all Russian crude oil exports. And of course, that's caused the White
House to do an about-face. Check it out. (US puts pressure on shale industry to do
'whatever it takes' to ease oil crisis. FT) But having said that, the question we are all
wondering is, can Russian oil be offset? How exactly does the Biden Administration
intend to achieve this? Well then... Listen up.
2(HOW TO EXCLUDE RUSSIAN OIL?)
This is the million-dollar question. The question that could send all of
Vladimir Putin's plans down the drain for good. Something like the final blow.
The White House and the other allied governments now want to achieve
such abundant oil supplies that they can put the oil embargo against Russia on the table.
But how on earth to achieve it, is it really something that can be done?
Well, in order to try to achieve this, we’ve identified a strategy
with four fields of action that the allied governments have put forward.
And the first of these has to do, precisely, with the fracking industry.
Despite all the hurdles the White House has put in the oil industry’s path,
the truth is that the drop in production is mostly due to the industry itself.
You see, the drop in prices between 2015 and 2019, and then the coronavirus on top of that
was devastating for North American fracking companies. These companies
lost tens and hundreds of millions and many of them ended up going bankrupt.
So now most are focused on investing less and taking advantage of oil prices to make cash,
pay dividends and buy back shares. And while the sky-high oil prices we
are seeing in the wake of the Russian aggression may be too tempting in and of themselves,
there is a question we have to ask, what could the US government do?
Well, they could start by changing their tune, streamlining permitting,
facilitating cheap financing for new projects and also repealing the Jones Act.
The Jones Act states that only US-flagged ships may move goods between US ports. This makes it
cheaper, in many cases, to import foreign oil than to buy domestic oil. For example, according
to the California Energy Commission, importing oil from the Gulf of Mexico can be 67% more expensive
than bringing it in from foreign countries. With all these measures, North American oil
production could increase by more than one million barrels per day by the end of 2022.
And, of course, it's not just about the United States.
N4(Boris Johnson opens door to fracking in response to Ukraine war
Prime minister looking at 'all options' as he prepares to draw up new energy strategy. FT)
Then in second place we have the old and long-standing partners.
The United States wants to get the hell out of the Middle East but it always ends up
coming back in the end. It seems almost like a curse, but here we are again.
If we’re talking about oil, we have to talk about the Middle East. And two countries in particular:
Saudi Arabia and the United Arab Emirates. These countries are among the few producers
in the world that invest money in having a lot of oil in storage and reserve production. That is,
they are able to increase their exports very quickly if an unexpected event occurs.
Look at this box for example:
As you can see, these four countries have the capacity to increase their combined production
by 4 million barrels each day, practically the equivalent of all of Russia's exports.
So even if they were to use 50% of this capacity, things could get very difficult for Moscow.
N5(Only OPEC Can Help The West Replace Russian Oil. OilPrice)
The problem is that the current relations between the White House and the Saudi Arabian government
are rather bad. But in any case that is what they are now working on. And so far it seems that the
United Arab Emirates has started to respond. N6(10 March: United Arab Emirates to nudge
Opec allies to increase oil production. FT) And then there are the bitter enemies with whom
Washington now seems to want to seek a truce. I am talking about Iran and Venezuela in
particular. Washington is getting down to work. Reaching a truce with Iran and lifting some of
the sanctions on Iran could inject a lot of supply into the market.
N7(Iran can reach top oil output 2 months after nuclear deal – oil minister - Reuters)
We are talking about approximately 1.4 million more barrels of oil per day.
In the case of Venezuela, this may be even more complicated. The Venezuelan
oil infrastructure is so damaged and deteriorated that it would be difficult
to increase production by half a million barrels in a year's time.
Not to mention the domestic criticism it has unleashed in the United States.
Be that as it may, the White House calculation is clear:
we are talking about 1.5-2 million barrels/day.
Let's see, there’s no simple solution and probably – what do you want me to
say – it will probably end in nothing, but I’m sure that now you understand the
backstory to the news and Washington's attempt of rapprochement with Teheran and Caracas.
I’ve already said that the invasion of Ukraine has changed
everything. These days in Washington they understand that Moscow poses a much, much,
much greater threat. And it is on this threat that they have to focus all their attention.
But we still have the fourth possibility.
Virtually every country has strategic oil reserves to draw on if for any reason
the supply fails or becomes too stressed. N8(US and allies agree to release 60 million
barrels of oil from their reserves as Russian invasion of Ukraine causes price spike. CNN)
Well, US strategic reserves, which are the largest in the world,
currently amount to about 575 million barrels. Due to this, the United States and allied
countries could go much further and make unprecedented use of these reserves to place
100 to 150 million barrels – or even more – on the market to reduce tension until the new sources of
supply we have discussed were up and running. Yes, it would be risky, but in addition to
alleviating the current supply shortfall, the measure could be linked to a commitment
to replenish reserves over the next few years, which would guarantee additional demand that would
further stimulate investment in the industry. I don't know, maybe it is a risk worth taking.
These are the four courses of action that allied governments
are considering to replace Russian oil. In addition, there is one other factor
that may prove to be significant: the weak situation of the Chinese economy,
the war in Ukraine, sanctions and, above all, the increase in the price of raw materials
and energy may slow down the global economy. This could translate into lower-than-expected
oil consumption and provide some margin. But of course, this is something that leads
directly to a final question: Why block Russian oil?
Well, the Russian economy is reeling from international sanctions.
Imposing an oil embargo, even if it is partial or does not affect refined products,
could be a checkmate. That is why Washington has wasted no time
admitting that they are working on this path. And, take note, because the Kremlin knows it too,
and that is why they try to drum up fear with statements like this one:
C1("It is absolutely clear that a rejection of Russian oil would have catastrophic
consequences for the global market. The price increase would be unpredictable. It would be
$300 per barrel, if not more". Alexander Novak, Russian Deputy Prime Minister)
Be that as it may, the numbers say that replacing Russian oil is possible, although it would have
to be done progressively. Of course, if this were to be achieved, we would be facing a very,
very tight market. This means that if things continue like this, gasoline prices will be
sky-high for a long time. Although surely not as high as Moscow is threatening.
N9(Britain to phase out Russian oil imports by end of 2022. Reuters)
That said, I'm sure many of you are thinking, but [Name of Host] What about China? What
role could China play? Well, soon we will publish two new videos where we will tell
you what role China is playing and what role it could play. So don’t forget to subscribe
to VisualPolitik and click on the little bell to be notified of these new videos.
But, the question now is: Will the allies succeed in finding an alternative
to Russian oil? Will we see an oil embargo? Leave us your comments below and if you found this
video interesting don't forget to like it. All the best and see you next time.