American motorists are feeling the pinch at the pump as gasoline prices in the United States reach record highs.
Although the US consumes little Russian oil, Russia’s invasion of Ukraine was a significant influence in the recent gas price surge – among other things.
Confused? We’ll help you through the process. Therefore, how does Russian oil harm the United States?
Russia exports the majority of its oil to Europe and Asia. However, the critical point is considering the global oil supply rather than the US.
The commodities world is intricately linked, and oil is valued worldwide. Thus, what occurs in one part of the world can affect another.
The issue at hand is that Russia is a major oil supplier. For instance, in December, Russia exported roughly 8 million barrels of oil and other petroleum products to global markets, including 5 million barrels of crude oil used to manufacture gasoline and other goods.
And, sure, a little portion of that Russian supply does make its way to the US – just 90,000 barrels of crude oil a day in December, according to the most recent US government statistics.
By comparison, Europe received 60% of Russia’s oil exports in 2021, while China received 20%.
However, remember that oil is purchased and transported globally via a global commodities market.
Thus, it is irrelevant who is directly impacted by the loss of Russian oil because reduced supply influences worldwide pricing regardless of who is impacted. And as we learned in Econ 101, when an item in demand is in short supply, prices rise.
For instance, if Europe purchases less Russian oil, it will need to replace it with oil from another source — potentially the mighty Organization of the Petroleum Exporting Countries, led by Saudi Arabia.
This increase in demand for OPEC oil will result in a rise in its crude prices. And who else purchases hundreds of millions of barrels of OPEC crude? The United States, as you would have imagined.
Why is there less Russian supply in the first place?
Initially, the West exempted Russian oil and natural gas from sanctions, notably the United States.
On Tuesday, the Biden administration changed direction, prohibiting the import of Russian oil and other fuels to the US, while the UK said that it would phase out Russian oil imports by the end of the year. (The EU is in a more difficult position on this point, as it is significantly more reliant on Russian oil.)
However, the early lack of explicit prohibitions had little effect on pricing. Since the invasion began, there has been a de facto prohibition on Russian oil, with most of the country’s supplies remaining unsold.
That is because oil dealers are extremely fearful of touching the substance.
There is much uncertainty around the purchase of Russian oil, whether it is about the capacity to conclude agreements in light of Russia’s financial system being sanctioned or about finding tankers ready to travel to Russian ports in the face of shipping concerns in a conflict zone.
As a result, Russia’s primary oil export to Europe is being sold at a significant discount, as nobody wants it. JPMorgan has calculated that Russia’s oil production has been effectively halted at more than 4 million barrels per day.
As a result, investors effectively price oil as though Russia’s supply is non-existent. Additionally, fewer supply equals higher pricing.
Why are other countries unable to produce more?
Covid attacks once more. Nobody desired oil in general in spring 2020, when worldwide stay-at-home orders eliminated the need for anybody to fill up and drive to work. With demand dwindling, oil prices fell along with it, momentarily trading at negative levels.
In response, OPEC+ significantly reduced output to maintain prices. And they’ve maintained modest production objectives since then, steadily increasing output even as demand for oil and gasoline recovered sooner than predicted.
Guess who a member of OPEC+ is? Russia. Thus, OPEC+ will not come to the rescue. Saudi Arabia had made it quite plain for months, even before the invasion, that the group had no intention of opening the oil taps anytime soon.
However, that steely determination may or may not be fraying. In a perplexing development this week, the UAE’s ambassador to Washington told CNN that the nation wishes to expand oil output and will push its OPEC+ colleagues to do so as well.
However, the UAE’s energy and infrastructure minister later stated that it would adhere to its OPEC+ agreement and progressively increase output.
The Iraqi oil ministry then stated that its leaders convened and agreed that its OPEC+ partners should maintain a balance of supply and demand to stabilize the market. Who knows at this stage.
Why then are US oil corporations unable to increase production?
Russia was the world’s second-largest oil producer in 2021, pumping 9.7 million barrels per day — while the US is the world’s largest, pumping 10.2 million.
American businesses do not adhere to such OPEC-style national output objectives. However, US oil producers are unable or unwilling to fill the supply gap, although they might profit handsomely from the high prices and demand.
Covid attacks once more. As is the case with many businesses during the epidemic, oil companies have difficulty recruiting people and obtaining specialized equipment.
Meanwhile, US oil businesses are still reeling from the 2020 oil collapse, which sparked a wave of bankruptcy.
Since then, the stock prices of major oil firms have underperformed the overall market. Additionally, as producers of fossil fuels, they are concerned that future environmental measures may undermine future oil demand.
The preceding demonstrates how oil and gas prices are influenced by geopolitical events, pandemics, drilling logistics, and various other factors. And it all adds up to an average US gasoline price of more than $4.33 a gallon on Friday.
In a nutshell, it’s all a matter of supply and demand. However, nothing is ever truly easy.