Call me a commie but cutting off Russian oil won’t help

As CNBC reports:

The U.S. is expected to announce today that it will ban imports of Russian oil. The White House has updated President Joe Biden’s schedule for the day to include an announcement of new U.S. actions intended to “hold Russia accountable for its unprovoked and unjustified war on Ukraine.”

Oil prices soared to over $130 on Sunday on rumors that the U.S. and its European allies would ban Russian crude.
One of the many misunderstood parts of the oil market is that not all oil is the same, and replacing Russian exports would require a very specific type of supply.
Currently, the options being talked about in the media as replacements are Iran, Venezuela, and U.S. shale, all of which present their own difficulties.

Irina Slav is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

According to a Reuters poll, an overwhelming majority of Americans from both parties support a ban on Russian oil. This effectively means that an overwhelming majority of Americans either support much higher gasoline prices or are unaware of the direct link between international oil prices and gas prices at the pump. Whatever the case, the government, at least, is aware that it would need to tread cautiously.

Slav points out that Crude oil prices are soaring, with Brent breaking $130 over the weekend as the United States and Europe discussed banning Russian oil imports. But according to some industry insiders, this might not be the smartest move.

“The only way to stop Putin is to ban oil and gas exports,” Scott Sheffield, chief executive of Pioneer Natural Resources, told the Financial Times in an interview last week. “[But] if the western world announced that we’re going to ban Russian oil and gas, oil is going to go to $200 a barrel, probably — $150 to $200 easy.”

The narrative in support of a ban is that U.S. local production will make up for the canceled imports. According to Sheffield, however, the process of making up will take a while.

U.S. inflation hit 7.5 percent in January, and there are few signs it will be coming down soon, even with the planned rate hike the Fed is expected to announce this month. Energy costs are a major contributor to higher consumer prices, and currently, energy costs are pretty much out of control, not least because of the Russian oil export ban discussions.

Sources of heavy crude are few and far between, although Canada is one of the biggest. Its exports to the United States, however, are not enough to satisfy the country’s refining industry’s needs. It was probably because of this that U.S. representatives this weekend traveled to Venezuela—a formerly big producer of heavy crude but heavily sanctioned by the United States.

Theoretically, Venezuelan and Iranian crude could make up for sanctioned Russian barrels. In reality, Venezuela’s oil industry will need time to ramp up production even if sanctions are lifted immediately, which has not been suggested publicly. Lifting sanctions on Venezuela without political reforms would effectively amount to recognition of the Maduro regime by the White House after years of insisting on a change. Meanwhile, Iranian talks have stalled, reminding us all that the Iran nuclear deal is not a certainty either. No wonder analysts are talking about much higher oil prices.

Why Russia will unite with China

Gail Tverberg is a writer and speaker about energy issues. This is a distillation of the article she posted to oil.com.

Russia now fears that it is near collapse, not too different from the collapse of the central government of the Soviet Union in 1991. Such a collapse would lead to a huge drop in Russia’s living standards, even from today’s relatively low level. The thing that seems to have been behind the 1991 collapse is the same thing that seems to be behind Russia’s current fear of collapse: continued low oil prices. While oil prices depend on “supply and demand,” as a practical matter, demand is very dependent on interest rates and debt levels. The higher the debt level and the lower the interest rate, the higher the price of oil can rise.

The fundamental problem behind recent low oil prices is the fact that the current mix of consumers cannot afford goods and services produced using the high oil prices that producers, such as Russia, need to operate, pay high enough wages, and do adequate reinvestment. No one knows precisely how much oil, coal and natural gas can be extracted because the quantity that can be extracted depends on the extent of the price rise that can be tolerated without plunging the economy into recession.

Europe, in particular, cannot afford high oil prices. If interest rates are increased soon, this will make the problem even worse. China seems to have definite advantages as an economic partner. In recent years, China’s consumption of energy products has been growing very rapidly. Perhaps, in the view of Russia, China can use high-priced fossil fuel better than other parts of the world.

Russia realized that the rest of the world is utterly dependent upon its fossil fuel exports. Because of this dependency, as well as the physics-based connection between the burning of fossil fuels and the making of finished goods and services, Russia holds huge power over the world economy.

Few people in America and Europe realize that the world economy is entirely dependent upon Russia’s exports of oil, coal and natural gas. This dependency can be seen in many ways. For example, in 2020, 41% of world natural gas exports came from Russia. Natural gas is especially important for balancing electricity from wind and solar.

Some believe that all the world needs to do is to move to wind and solar for its energy needs. This narrative of success is completely false. Instead, we seem to be hitting energy limits in the near term because of chronically low prices. Wind and solar are doing very little to help because they cannot be depended upon when needed. Furthermore, the quantity of wind and solar available is far too low to replace fossil fuels, says Gail Tverberg who warns that if higher energy prices cannot be achieved, there is a significant chance that the change in the world order will be in the direction of pushing the world economy toward collapse.