Why Do Russian Oil And Gas Matter To The Global Economy?

^{Image: A gas tanker is being filled up with a liquefied natural gas plant on Sakhalin Island, Russia.[Credit…Sergey Ponomarev for The New York Times]}

The conflict persists, and its repercussions are widening. The global economy reels under the weight of fluctuating oil prices, dealing a severe blow to nations worldwide. Here’s an excerpt from a prior article dated 14th Jan’2023 in “The New York Times” delving into this very issue. It merits attention.

Why do Russian oil and gas matter to the global economy?

By The New York Times

Energy exports are the cornerstone of Russia’s economy. In recent years, Russia has sent large quantities of its natural gas and oil to Europe, the United States, and elsewhere. Now the Russian invasion of Ukraine threatens already-troubled global energy markets with more disruptions and rising prices. In the latest jolt, the U.S. banned imports of Russian energy and European nations pledged to gradually follow suit. Here are answers to some common questions about the world’s reliance on Russia’s energy supplies.

U.S. oil output doubled in the past decade as producers embarked on a frenzy of drilling in shale fields and in the deep waters of the Gulf of Mexico. However, production has been slow to recover since it plummeted by a million barrels per day in 2020 as demand fell amid the pandemic. Even before Covid, investment in new production had been squeezed as investors demanded that oil companies drill-less and return more cash to shareholders.

The Energy Department recently predicted that daily national output would rise to 12.6 million barrels a day in 2023 from its average of 12 million barrels this year. That would be 300,000 barrels above the 12.3 million barrel record set in 2019, a tiny increase in a global market of 100 million barrels a day. Substantial increases will take time to achieve, and require oil companies to harness more manpower and equipment.

How much oil does Russia supply?

Russia provides roughly 10 percent of the global supply of oil.

Russia is one of the three top oil producers in the world, after the United States and Saudi Arabia. Shortly after Russia’s invasion of Ukraine in late February, traders and European refineries significantly reduced their purchases of Russian oil. On March 8, the U.S. announced a ban on all Russian oil imports. Economists suggested the move could have small but potentially meaningful economic consequences for the U.S. economy, and gas prices reached a new high. President Biden said the plan would target the “main artery” of the Russian economy.

Where does the United States get its oil? How much comes from Russia?

The United States produces most of its oil domestically, but the rest comes from Mexico, Saudi Arabia, Egypt, and, before this ban, 10 percent of its imported oil came from Russia.

The United States relies on Russia for only about 3 percent of the oil it consumes — about 600,000 barrels per day. About 60 percent of U.S. demand is satisfied by domestic production, and that amount is modestly rising, with the Energy Department predicting that the average daily output will rise to 12.6 million barrels by 2023 from about 12 million barrels. Russian oil represents less than 10 percent of U.S. imports, with the rest coming primarily from Mexico, Saudi Arabia, and Egypt.

By contrast, Europe relies on Russia for about one-third of its total oil imports.

Can the United States produce more oil?

It’s not that simple. Multiple factors, including fewer drilling sites, a shortage of workers, and antitrust laws, inhibit oil production in the United States.

The United States has mostly become energy independent after the shale boom that began in the late 2000s. Despite its environmental effects, companies started fracking to extract oil and gas from the shale layer across the continental United States, a costly process that allowed the country to become the world’s largest oil producer. That hasn’t been the case since the 1960s.

That renewed dominance helped tamp down oil prices as U.S. producers took market share from OPEC Plus nations. They outflanked competitors in supplying growing global markets, particularly China and India, while slashing imports from the Middle East and North Africa. In 2018, the United States became the world’s largest oil producer with a record output of more than 10 million barrels a day, according to the International Energy Agency.

But the boom may already end. By early 2022, growth in output had slowed and U.S. producers were finding fewer places to drill. Altogether, inventories are becoming crimped. Even before the pandemic curved demand for oil, U.S. producers had lowered production to pump up profits as investors demanded returns as dividend payments and better financial performance.

Thousands of oil workers have been laid off or left the industry over the past three years. There is also a shortage of sand necessary for puncturing hard shale to capture oil stored in the rocks. Executives are also reluctant because when they rushed to drill more in recent decades as prices rose, oil frequently crashed, converting booms to busts.

For now, domestic oil suppliers still plan to increase output, but at a slower pace. Supply chain woes and worker shortages have also cut into production.

Unlike OPEC Plus, U.S. companies are also subject to antitrust laws and cannot coordinate to manage oil output. They are also private entities and cannot be ordered to simply produce more.

Can’t the world just produce more oil?

Yes, but not fast enough to offset the recent rise in gas prices.

About half of the world’s oil production depends on a cartel of oil-rich states known as OPEC Plus, a group of 23 nations led by Saudi Arabia and Russia. It does not include the United States.

OPEC stands for the Organization of the Petroleum Exporting Countries, a group of largely Middle Eastern nations that was formed in 1960; “Plus” refers to the nations that agreed to work with OPEC starting in 2016, a contingent that includes Russia.

The cartel decides how much oil to produce, keeping in mind that pulling more oil out of the ground increases supply, thus lowering the value of each barrel. But if prices rise too high, it could curb demand, lowering the value of oil. The group tries to keep prices as tolerably high as possible, a state of play that has often drawn condemnation from U.S. politicians accusing the group of acting as an illegal monopoly. (In recent years, lawmakers have tried to pass bills that would allow them to sue OPEC producers for price collusion.)

After the invasion of Ukraine, the cost of oil soared. Oil markets often react negatively to geopolitical instability. Less than a week after Russia’s military incursion, OPEC Plus producers held a regularly scheduled meeting and kept oil prices high by maintaining a modest increase in oil production. One co-chair of the group is a Russian deputy prime minister, Alexander Novak.

Russia had seen slumping demand for its oil after its invasion of Ukraine. It struggled to sell its inventory even after offering discounts of as much as 20 percent.

Before Russia started its war on Ukraine, OPEC Plus was increasing oil production at only a modest clip to reap higher profits. Energy companies had been trying to claw back lost dollars after the pandemic caused a worldwide slump in the economy.

Why are gas prices so high right now?

Gas prices are up because companies raised prices as part of a post-pandemic economic recovery plan and because of Russia’s involvement in Ukraine, both before the U.S. ban on Russian oil was in place.

Gas prices had been rising even before the invasion of Ukraine for a combination of reasons. After businesses recovered from the pandemic, consumers began spending more. Companies increased the prices of everything from doughnuts to hotel rooms. With more consumers traveling and spending, oil suppliers scrambled to keep up with the rising demand, leading to higher prices at the pump. But that wasn’t the only factor. The pandemic caused massive disruptions to global supply chains, increasing the cost of delivering goods, such as oil.

After Russia invaded Ukraine in late February, several European nations and the United States imposed sanctions on parts of the Russian economy, but they steered clear of disrupting its oil and gas exports. The idea was to punish Russia without inflicting pain on consumers in Europe, which highly depends on Russian gas and oil.

But the Russian attack stoked outrage across the world and many businesses halted or curtailed their investments and operations in Russia altogether. That included the oil giants Shell, BP, and Exxon Mobil. Russian oil and gas suddenly became toxic to many buyers, cutting into the global oil supply and leading to higher gas prices.

On March 8, less than two weeks after Russia invaded Ukraine, the U.S. announced a ban on all Russian oil imports, further increasing the potential for higher gas costs. President Biden said the plan would target the “main artery” of the Russian economy, but it also meant sacrifices by western nations. That same day, gas prices in the United States reached a new high.

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Why do Russian Oil and Gas Matter to the Global Economy?