The Russian invasion of Ukraine has generated a humanitarian catastrophe and disrupted European security. It is also reshaping global energy. Russia is among the world’s largest suppliers of oil and natural gas. The Biden administration is leading a diplomatic push for sanctions that impact the ability of Russian oil and gas exporters to secure financing and maintain access to global customers, and recently announced a direct ban on Russian oil exports to the US.
In this piece, Dr. Robert J. Johnston, a senior adjunct research fellow with the Center on Global Energy Policy, answered questions about the ability of international and US oil producers to react to the loss of Russian oil supply, as well as how the Ukraine crisis may influence energy policy discussions in the US.
What are the short- and longer-term market risks of the Ukraine crisis in terms of Russian oil supply?
Markets are reacting to both actual disruptions and delays in physical short-term markets and a heightened risk of longer-term structural disruptions. The former are influenced by problems in the shipping and trading market as normal buyers of Russian crude seek to avoid the reputational, financial, and even legal risks of doing business with Russia. Long-term structural disruption will come as sanctions take hold and major global oil companies exit the Russian market, forcing Russia to sell its oil to a narrower set of countries outside the Organization for Economic Co-Operation and Development (OECD). Extremely high prices will temper industry and consumer demand, but there is also a need for more oil.
How can OPEC react to replace Russian barrels?
Russia exports 3 million barrels per day of crude oil to the EU, Japan, Korea, and the US, in addition to 2.3 million barrels per day of refined products. Replacing these 3 million barrels will likely require increased crude oil imports from OPEC countries with spare production capacity such as Saudi Arabia and the UAE, as well as increases in US shale production. These sources are more flexible in terms of production and can ramp up faster in response to market conditions than other petroleum sources such as deepwater or the Canadian oil sands, which will likely contribute in the longer term.
Saudi Arabia and other OPEC countries with spare capacity can react fastest to any lost supply, but their desire to do so is complicated by numerous factors including uncertainty about demand, the length of the Ukraine crisis, the potential timing of more barrels from Iran, and geopolitical considerations regarding their own relations with Russia. Russia is a key oil producer partner in the so-called Organization of the Petroleum Exporting Countries Plus (OPEC+), which coordinates production policy among member countries.
Where does the US stand in terms of lost supply from Russia and how can US shale producers increase output?
US oil production currently stands at approximately 12 million barrels per day. Even a return to the pre-COVID high of 13 million barrels per day would require at least 2-3 million more barrels of supply from OPEC or elsewhere to replace a full disruption of Russian oil exports to the OECD countries. The US imports a relatively small amount of Russian oil and refined products—between 200,000 and 400,000 barrels per day over the last year, compared to total consumption of 20.7 million barrels per day. As such, its diplomatic efforts are focused on sanctions that affect the sale of Russian petroleum in the EU and Asia. In the US market directly, Russian fuel oil goes to US Gulf Coast refiners to be reprocessed into diesel, and some Russian crude and gasoline goes to markets and refineries that either are difficult logistically to link to shale production or have specific configurations suited for Russian feedstock. The US can replace most of this oil and gas with production from the US and Canada, but the response time is far from immediate.
Can the US get more oil from Canada to replace Russian supplies?
Canada is the largest supplier of crude oil to the US via a large system of pipelines connecting Western Canadian production to refineries mostly in the US Midwest and Gulf Coast regions. Canadian producers can send more through the recently expanded Line 3 pipeline, which added 375,000 barrels per day of export capacity to the US. The Keystone XL project could have added significantly to this capacity but was rejected by the Biden administration in January 2021. Even with Keystone XL, however, an increase in Canadian production would have depended on a range of factors, including long-term price forecasts, Canadian environmental policy, and the availability of heavy crude from elsewhere.
What about Venezuela and Iran?
Venezuela and Iran both produce heavy oil that is well-suited for US refiners. Both countries are also currently subject to sanctions that restrict their ability to export to the US directly and to major oil consumers in the EU and Asia. Lifting sanctions is possible, but would require progress on national security issues, including a new nuclear deal with Iran and political reforms in Venezuela. Importantly, both countries would require investment and time to ramp up production, so they could not increase supplies quickly.
How will the Ukraine crisis shape discussions about US energy independence?
US energy independence has been the subject of a long-standing debate within US policy circles. Generally, the US benefits from integration into global oil markets—it can import from many countries and export the surplus of domestic shale oil and refined products that have developed over the last decade. But this integration also makes it susceptible to global market disruptions. Currently, the US shale industry is recovering from the COVID shock, which caused oil demand to plummet and industry to reduce production accordingly. The shale sector also had poor returns for its shareholders pre-COVID as many companies invested at levels in excess of free cash flow. The current shock in Ukraine and associated risk to oil markets is signaling a need for US supply, and producers will likely respond.
How will the crisis shape policy around renewable energy and electric vehicles?
The US picture is mixed in this regard. There has been little legislative movement due to Congressional infighting over climate and clean energy policy and a moderately less dire energy security situation compared to the EU. Although oil and refined product prices in the US are affected by global conditions, the US (unlike the EU) is a large oil and gas producer and its producing regions will benefit in part from market conditions, helping to alleviate the shock to consumers who are contending with higher prices. Meanwhile, both the US and Canada will double down on their support of Europe’s efforts to accelerate its transition to low carbon and renewable alternatives through exports of low carbon fuels and investments in clean energy supply chains. Despite strong political commitment, these efforts will take several years before achieving a scale that would materially displace Russian oil and gas.