The World Has a Russian Oil Problem. Here’s the Best Way to Solve It
Biden Administration has deployed seasoned American diplomats all over the world to increase oil production. So far, however, there have been few successes. Even though the President made a public appearance, it had little impact. Biden’s diplomatic core works hand in glove to seek out oil pariahs Iran or Venezuela for more supply. It may not be a good idea to continue to spend diplomatic capital on countries that are at high risk.
Let’s start with the details. Russia is a powerful producer of oil and natural gas. It also produces refined petroleum products, such as diesel fuel or vacuum gasoil. These are all difficult to replace. However, as Europe experiences a decrease in winter demand for natural gases, it is now that the market for crude oil will be the most pressing problem.
Russia exports close to 11,000,000 barrels per day of crude oil. In February 2022 Russia exported 4.7 million barrels per day of crude oil, with about half of these going to European refiners. According to estimates, 1.6 million barrels per day of Russian crude oil are lost without buyers. This is effectively a supply shortage. The list of refiners that refuse to buy Russian crude crude is increasing. In the future, it is likely that rejected volumes will rise. The pipeline shipments to China of approximately 1.6 million barrels per day are increasing at an alarming rate. According to current assumptions, some Asian buyers may continue buying oil that is highly discounted.
The task of replacing Russian crude, especially if further bans emerge in the G-7, is more challenging in today’s tight market than it was to replace similar volumes when Iraq invaded Kuwait in 1990. Oil markets were facing an oversupply in 1990. Due to the fact that demand rose to a remarkable 5.5million barrels per day by 2021, as vaccines and other economic stimuli boosted the U.S. economy and the global economy respectively, the oil supply has struggled with keeping up the required pace. The Organization of Petroleum Exporting Countries (OPEC) also kept its taps partially shut, even as demand was recovering in over the course of 2021, helping boost oil prices prior to Russia’s military campaign. One possible explanation for OPEC’s lack of response last fall was a desire to undermine the Glasgow COP26 climate meetings by facing governments with soaring energy costs.
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Oil price spikes in the past, such as 2008’s $147 oil price explosion, have led to severe recessions and a drop in oil demand. It was reasonable to expect that countries like Saudi Arabia, UAE, and other Arab nations to take over production to meet their own needs. Saudi Arabia and UAE would likely replace the majority of the currently rejected Russian uncontracted crude oil from their spare capacities, however, they claim that this would scare the market, rather than bring calm, signaling that the entire world’s potential to produce more oil was exhausted. To that basic premise, which has some merit, they have added a giant laundry list of complaints, from Biden’s directed statements on human rights to U.S. pursuit of a rekindling of the Iran nuclear deal.
Further complicating matters is the fact that Russian oligarchs are also being hosted in UAE. It is possible that the U.S. will rethink its foreign policy, and continue to be cautious about Middle East tensions related to conflict frozen in the region. Abu Dhabi has been subject to missile attacks from Yemen in recent weeks and Saudi Arabia has a long memory regarding the Trump administration’s muted response when its oil fields were attacked in 2019. Russia, however, has not been affected by the missile attacks from Yemen in recent weeks. quietly built upLibyan military intervention, which gives the country leverage to subtly interrupt flow.
Other than the traditional U.S. Oil Allies from the Gulf region, a restart of Iran’s nuclear deal could be on the table, but is currently stalled by Russian-instigated related snags. This would also allow for an additional 700,000 barrels per day in new crude oil supply to China over the next few month, should sanctions against Iranian crude oil exports to be lifted. If a deal is reached, Iranian crude oil exports could reach 1.5 million. They currently average 800,000. b/d. The Biden team are also scoping an improvement in relations with Maduro’s Venezuela, again ostensibly in hopes of more oil.
While better relations with Venezuela might be important to prevent Russia from installing weapons systems there, a beneficial oil outcome is less clear since the country’s oil installations are badly damaged by neglect, mismanagement, and looting. The country’s crude oil output has recovered recently to 600,000 b/d, but going beyond that would take time and billions of dollars. The Wall Street Journal reports that Venezuela still has oil stored in its storage, which could be used immediately to make a deal. The Biden administration had already facilitated Chevron’s return to its heavy oil venture in Venezuela when it came into office under a special waiver of sanctions. Chevron, one of the four international heavy oil joint ventures that together produce 400,000 barrels per day, is Chevron. Their 2015 production capacity was 1.3 million barrels/day.
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The Biden team could do a better job lobbying U.S., Canadian and other oil industry leaders. They have many shale resource potential that can be tapped with more drilling. This would be similar to PPE for the COVID-19 war. It is difficult to estimate how much additional production can be achieved in six months with an aggressive war effort that involves U.S. government funding. However, officials from the industry say it would be possible to increase oil production by 500,000 to 1,000,000 b/d. Based on the current drilling plans, ConocoPhillips chairman Ryan Lance predicted that U.S. crude oil production could rise to 900,000. Texas already has a pipeline infrastructure so additional oil production would depend on whether any other logistical bottlenecks such as hiring more drilling crews, eliminating supply chain restrictions for sand and steel or machinery spare parts, could be eliminated.
Canada claims it is able to almost instantly increase oil production from its existing fields by almost 400,000 barrels/day and transport it via existing pipeline capacity. Canada can do even more with an additional investment. Canada could do more if it imported more crude oil to the United States from Canada. This would help replace any cargoes coming from other sources that could then be sent to Europe.
While it will be difficult to replace all of Russia’s 2.5 million b/d of crude oil normally destined for Europe with North American increases, it could go most of the way, combined with releases from government-held strategic stocks, and it would be home grown. It seems more preferable than the uncertain diplomatic dance that involves riskier suppliers.