As Russia began its invasion of Ukraine last week, one of the first barometers of what the fallout might mean economically for the rest of the world was registered by the oil market.
Brent crude oil — a benchmark for oil pricing — jumped to $105/barrel for a while, its first appearance over $100 since 2014. But within a day it had settled back down into the $90s — still an inflated number, but energy prices were already high, largely due to the pandemic. It began spiking over $100 again after Russian President Vladimir Putin made nuclear threats on Sunday.
There are other economic concerns related to Russia: It’s a major worldwide wheat supplier, along with Ukraine, and it mines a variety of metals that are used in many products.
But it’s Russia’s stash of oil and natural gas that seems to have folks in the U.S. and Europe on edge.
For the most part, those products have not been hit by sanctions and are still moving around the world as they always have. Though that could change, the initial oil price spike may have been more panic than reality.
We decided to do a little fact-checking and crystal ball-gazing on Russia, the U.S. and oil and gas. To do that we tapped (pun intended) the expertise of Michael Oristaglio at Yale University, where he co-founded and directs a program called Energy Studies and previously ran Yale’s climate and energy institute. He is a research geologist specializing in energy and spent more than 25 years working for Schlumberger in its main oilfield services research center.
Basic numbers
The data cited below is from the International Energy Agency (IEA), the Energy Information Administration (EIA) — the statistical arm of the U.S. Department of Energy — and BP’s Statistical Review of World Energy, 2021, contained in its 70th annual report.
The U.S. is the No. 1 producer of oil and natural gas in the world. In 2021, Russia was No. 2 in both, though usually Saudi Arabia is second in oil production.
The U.S. is also the top consumer of both oil and natural gas. Russia is the No. 2 net exporter of oil and the No. 5 net exporter of natural gas.
Oristaglio points out that what these numbers show is that the U.S. is largely energy self-sufficient, though it does import both oil and natural gas.
For natural gas, it only imports about 2% of what it needs — from Canada and Trinidad and Tobago. And while it’s a top net importer of oil, that is due to refining issues that cause the U.S. to import some of its own oil that is refined elsewhere.
Only about 6% of the oil imported by the U.S. in 2020 came from Russia, according to the BP report, and nearly all of it was refined product, not crude. The majority of this country’s imported oil comes from Canada.
Why are prices so high?
The short answer is the pandemic. Energy usage dropped worldwide in the first year of the pandemic, so suppliers, including Saudi Arabia, scaled back. Prices then dropped so dramatically that some suppliers got out altogether because it just wasn’t cost effective to stay in.
With countries emerging from the pandemic, supplies tightened faster than production could ramp up. That pushed prices higher. Higher prices mean some suppliers might get back in. But in both instances, it’s generally a lot more complicated than just flipping a switch.
“Depending on what actually happens in Russia, the market is much more geared to respond quickly to shortfalls in supply than it was 20 years ago. Twenty years ago, a shortfall in supply like this would take a long time to work off,” Oristaglio said.
What began during the pandemic could be exaggerated by Russia’s invasion of Ukraine and the response from other nations. But we really don’t know that yet.
Who is most vulnerable?
That would be Europe.
Europe gets about 40% of its natural gas and more than 25% of its oil from Russia. That amounts to nearly 75% of Russia’s gas and more than half its oil. In the last few months, however, Russia cut back its gas exports to Europe by about 25%. It’s unknown if that was a preparatory move for the Ukraine invasion.
The move has depleted Europe’s storage, and the U.S. has been providing natural gas to Europe to help backfill what it lost.
But the pain from shutting off or dramatically curtailing Russian supplies to Europe would flow in two directions, harming both Russia and Europe.
Germany is getting a taste of what that would mean. In the wake of the Ukraine invasion, Germany indefinitely halted final approval for the Nord Stream 2 gas pipeline from Russia to Germany. It is built, though no gas has flowed.
The move could force Germany to rethink its energy supplies, along with a decision made in the wake of the Fukushima nuclear disaster to phase out all its nuclear facilities and replace some of that power with gas generation. The fuel for them would have come from Nord Stream 2.
Why we should worry
These are global commodities, Oristaglio explained.
“Oil is the most global commodity, so a change anywhere around the world will ripple around the world because oil can be shipped very easily,” he said. “You put oil on a tanker in the Middle East and ship it to the U.S.”
That hadn’t been the case with natural gas, because natural gas was transported through pipelines. While those pipelines could run under some large bodies of water, it wasn’t possible to transport natural gas under, say, the Pacific Ocean. But now natural gas can be liquified and shipped by boat or truck or train.
“There’s now more of a global trade in natural gas, so price disruptions anywhere in the world can affect the prices here,” he said.
Essentially, the U.S. could get caught in the crossfire even though it’s not a major direct recipient of Russian energy supplies.
In addition to the Nord Stream 2 halt, Gazprom — Russia’s giant, mostly state-owned gas and oil company — was cut off from western credit markets as were the country’s largest banks, which could have an impact on other Russian energy companies. BP announced over the weekend it would exit its stake in another Russian oil company.
There’s now an open question of how many other major international energy companies will do the same with their Russian investments and what that would mean for energy supplies and costs.
So far, sanctions have sidestepped Russia’s energy sector.
The biggest X-factors on the worry side of the ledger: a full-scale, multinational war and the potential for cyberattacks by Russia. If cyberattacks were targeted in ways to disrupt other countries’ energy supplies, Oristaglio said, it could cause “a huge disruption,” and he pointed to the cyberattack on the Colonial oil pipeline in the U.S. last year that caused fuel shortages and price spikes in 17 states and the District of Columbia.
Why we shouldn’t worry
There’s a lot of oil and gas in the world. The top five confirmed oil reserves in the world are in Venezuela, Saudi Arabia, Canada, Iran and Iraq. Russia has the most gas reserves, followed by Iran, Qatar, Turkmenistan and the U.S.
If Russia turns off the supply or buyers boycott Russia, there’s room to maneuver.
“If there were a crunch in supply from Russia, the Saudis have excess capacity, they could fill it,” Oristaglio said. And it wouldn’t even take that long. “In some cases, just turning spigot a little bit counterclockwise, so it opens up on a lot of their fields.”
The U.S. could even ramp up production in the Permian Basin in Texas. “That’ll take a little bit longer,” he said.
He points out that over the years there have been any number of geopolitical disruptions in key energy-producing parts of the world — the Mideast in particular — and energy markets have adjusted.
“The basic message of the last 20 years is that anytime the oil price spikes, a lot of oil comes on the market to drive it back down again,” he said. “There’s a lot of supply around the world.”
The big message
“Don’t panic,” Oristaglio said. “But if things spiral in a bad direction because Putin is just a madman, which some people think he is, then that would be the stuff to worry about. I think the commodity markets will adjust, but it’s going to be painful for a bit in the meantime because it takes these markets several months at least to adjust. But they will.”
What we should be trying to figure out, he said, is how to deal with the world’s energy needs — not how to deal with Russia.
“Europe should get the message that we need to move to renewable energy as fast as we can now. This playing footsie with Russia, and better economic integration — let’s take their natural gas — they’re going to come to regret that,” he said. “If they had worried about geothermal, for example, for their heating, [or] district solar for their heating, they’d be in a much better position to just say, ‘all right, you don’t want to sell us your gas, we’re fine.’”