Russian Oil is Sanctioning Itself, But We Can Help
Price Supports for U.S. Shale, and Other Weird Tricks to Thwart Putin
Markets are doing what Western leaders would not: stopping the sale of Russian oil abroad. A lot of it anyway. The U.S. and European Union wanted to slam Russia with unprecedented financial sanctions, while keeping its oil and gas flowing to minimize pain back home. Turns out, though, that you can’t sell oil without finance, and financial middlemen (middlepersons?) are afraid to touch Russian letters of credit, Russian collateral, and suchlike with a 10-foot pole.
“Almost 70% of Russian oil is struggling to find buyers,” JP Morgan analysts reported a few days ago. “Russian benchmark Urals oil is being offered at a record $20 discount to international benchmark, with no bids.”
That’s good, sort of, if you don’t mind the international benchmark at $118 a barrel. Russia, for the moment, is sustaining much worse damage than Iran has under formal, on-paper draconian U.S. sanctions. The Islamic Republic lost a third of its crude production over the last four years, dipping from 3.8 million to 2.5 millions barrels a day.
It’s safe to assume that traders and end-buyers, with zillions of dollars at stake, will start figuring out how to negotiate the financial sanctions, and get some of that stranded Russian oil to market again. But the sharp stop should get the rest of the world thinking about how we could do with less Russian oil permanently.
Russia is an oil monster, exporting 7.8 million barrels a day last December, according to the International Energy Agency. That includes 5 million barrels of crude and 2.8 million of refined products — 8% of global supply give or take. Shutting all that off with a turn of some mythical valve would be cataclysmic indeed.
But as Iran shows, sanctions don’t work that way. Another example is Venezuela, which has maintained half its output — 750,000 barrels at last count — despite a “maximum pressure” policy from the U.S. since 2018. Rogue buyers in China and elsewhere, operating without settlement in dollar or euro, will always step up for the right price.
So assume oil sanctions on Russia would hit half its exports, or a little under 4 million barrels a day. Replacing that volume sounds a lot more doable. Iran itself looks close to a renewed nuclear deal that could bring its lost 1.3 million barrels off the bench. (Maybe trading one headache for another, but Joe Biden wanted to do it anyway.) Saudi Arabia and the rest of OPEC have 4-5 million barrels in spare capacity. So say they could be cajoled to kick in another 1 million.
Then there’s U.S. shale, which became the global swing producer during the last two oil booms, and got burnt for it when the booms busted. America added nearly 3 million barrels of daily output in the two years before the pandemic hit. Then, in March 2020, prices abruptly crashed from $67 to $21.
The magic of shale is you can drill a well and exhaust it in a year or two, rather than needing to forecast prices decades in advance, as with multi-billion dollar conventional oil strikes. So if the U.S. government could guarantee a price for, say, the next three or four years, wildcatters in Texas, New Mexico and North Dakota might get back to their feverish ways.
Breakevens for new shale wells are estimated around $50 a barrel. So a price support of $60, half of today’s price, might do the trick. Biden’s progressive base might howl about corporate welfare. But the price floor would only kick in if the policy was fantastically successful.
And let’s not forget consumption. Expectations of drum-tight oil supply and climbing prices assume a pandemic-recovering world will use 3.5 million more barrels a day in 2022, by IEA figures. Maybe Vladimir Putin’s rending of Western civilization and hints at nuclear blackmail should rewrite that script a little. The U.S., where I live, still uses 20% of the world’s oil, and two-thirds of that goes for transportation, according to Washington’s Energy Information Administration.
Would Americans, so accustomed to outsourcing their sacrifice to paid soldiers, drive 10% less for Ukraine and Freedom? That could, by my back-of-napkin math, cut 650,000 or so barrels from global demand. What conscience doesn’t do, prices at the pump well might anyway.
None of these bright ideas stand much chance of changing the battlefield calculus in Ukraine. It’s inconceivable that Putin will say, “Gee, I didn’t realize the war would hurt ordinary Russians so much. I’d better stop.” And highly unlikely that those ordinary Russians could overthrow their leader, even if they wanted to.
That hardly means it’s pointless to slice into Russia’s economic power, and demonstrate its dependence on the Free World Putin so loves to sneer at. Whoever succeeds Putin in Moscow, and someone must sooner or later, will have overwhelming incentives to rejoin the community of nations. And others — that means you, Mr. Xi — are getting a good look at what they risk with their own reconquista dreams.
It is rash bravado to think we could do without Russian oil tomorrow. But we could probably do with a lot less of it, and soon. Gas is another story, for another post.