President Joe Biden announced on March 8, 2022 that the US would ban the import of oil from Russia, as well as refined petroleum products, natural gas and coal. The ban is the latest US action to punish Russia for invading Ukraine. Global energy policy expert Amy Myers Jaffe explains how the move could affect oil prices and Russia.
How important is Russia as a supplier of oil to the US?
Russia produces about 11 million barrels of crude oil per day. It uses about half of this production for its own domestic demand, presumably boosted by higher military fuel requirements, and exports between 5 and 6 million barrels per day.
Today, Russia is the second largest producer of crude oil in the world after the US and ahead of Saudi Arabia, but sometimes this order changes. In 2021, Russia earned more than $110 billion from oil exports, twice its revenue from natural gas exports.
For the US, Russia is a relatively small source of oil. In 2021, it provided 8% of US crude oil and petroleum product imports. At times, this proportion has increased in recent years following events such as sanctions against Venezuela and storms that disrupted offshore production last year in the US Gulf of Mexico.
But Russian crude oil is not really a staple for US refineries. Purchases fell to 84,000 barrels a day when the Biden administration formally announced a ban on imports. It will be a minor inconvenience for US refiners to avoid Russian oil.
The reverse is also true: U.S. purchases hardly count against Russia’s huge oil revenues. To be effective, individual country bans need to be combined in many countries to have consequences that really affect the Russian wallet.
What about other countries buying Russian oil?
The task of introducing such bans is much more difficult for Europe. The UK, which is an oil producer, also bans Russian oil imports, but joining other G7 countries such as Germany, Italy and Japan would be a difficult diplomatic climb. It’s not impossible, but Germany – Europe’s largest economy – is currently holding back, although it is making plans to find alternatives.
About half of the oil exported by Russia goes to European countries, including Germany, Italy, the Netherlands, Poland, Finland, Lithuania, Greece, Romania and Bulgaria. China is another big buyer, importing 1.6 million barrels a day of Russian crude oil.
It remains to be seen whether China will take any additional Russian oil, which is likely to be heavily discounted, and trade it for other barrels that can be sourced by European refineries. India has already bought Russian oil at a deep discount.
Because oil is a relatively fungible global commodity, at least some of Russia’s crude oil exports to Europe and other countries that might join the US and UK in imposing oil sanctions could end up going somewhere else. This would free up other supplies from sources such as Norway, Angola and Saudi Arabia to be diverted back to Europe.
Russian oil has a high content of sulfur and other impurities, so its processing requires special equipment – there is nowhere to sell it. But other Asian buyers, including India and Thailand, may also take it.
Can European countries get oil from other sources?
Europe and the US could simultaneously increase sales of crude oil from their national strategic reserves to soften the impact of any further restrictions on Russian crude oil imports for the G7 countries. The US is already selling 1.3 million barrels a day of its strategic oil reserve and has said it will increase those flows. China has also released oil from its national strategic reserves to drive down oil prices.
However, determining how much strategic oil to release at one time depends on the perception of the length of the conflict and whether it could spill over into Ukraine. These are both unknown.
The US and other G7 members could also ask Middle Eastern countries to ease destination restrictions on their crude oil shipments and put pressure on countries like China and India to divert other oil of similar quality to Russian oil back to Europe. if and when they increase their supplies. purchases from Moscow. Such moves would help mitigate the additional upward effect of any future G-7 restrictions on Russian oil imports.
It is not certain that China and India will cooperate, but it will be in their interests. They are major oil importers and would not like higher crude oil prices.
How can a reduction in oil purchases in Russia affect world oil prices?
One effect is already clear: markets have anticipated possible energy sanctions against Russia by discounting Russian oil. Refiners, who are not required to accept it under firm legal contracts, avoid spot or non-contract cargo leaving Russian ports.
According to one industry publication, this has led to the fact that approximately 1.6 million barrels per day of Russian oil could not find buyers. The result has been a large-scale disruption in global oil supplies, which is already pushing up prices, although physical oil is still basically available. .
There is a limit to how much oil is available to replace lost Russian crude oil exports. Most exporters have exhausted their crude oil production, but a few of the Middle East’s largest producers may ramp up production in the short term to bring an additional 1 million barrels per day or more to market.
The Biden administration is continuing talks with Iran to restart the nuclear deal suspended by President Trump in 2018. If that happens, Iranian oil exports could rise from the current 800,000 barrels per day to around 1.5 million barrels per day within three months or so.
But Russia is a party to the nuclear deal and has demanded assurances that its economic trade with Iran will be exempt from any sanctions related to Russia’s invasion of Ukraine. This demand slowed down diplomatic progress.
Saudi Arabia has access to large reserves of crude oil in its vast global tank system and offshore tankers. In 2014, when Russia invaded Crimea, US allies in the Persian Gulf held more than 70 million barrels in storage near Fujairah in the United Arab Emirates. They did this by threatening Russia with a price war if Russian troops moved beyond the peninsula. Russia remained in the Crimea, so oil was not released.
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The Saudis have unleashed price wars that hurt the Russian economy before, in 1986, 1998, 2009, and again briefly in 2020. But today’s oil market conditions make a price war unlikely, given the current tight balance between supply and demand. The only scenario that could trigger a price war right now is a sudden drop in global demand due to a recession.
This is an update to an article originally published March 1, 2022.