By Amy Myers Jaffe
One option the U.S. and other nations have for ratcheting up pressure on Russia in response to its invasion of Ukraine is reducing their Russian energy purchases. U.K. Foreign Minister Liz Truss has proposed that the G7 nations – the U.S., U.K., Canada, France, Germany, Italy and Japan – impose limits on their Russian oil and gas imports. Global energy policy expert Amy Myers Jaffe explains how this strategy might work and how it could affect international oil markets, which have already been roiled by the conflict.
How important is Russia as a global oil supplier?
Russia produces close to 11 million barrels per day of crude oil. It uses roughly half of this output for its own internal demand, which presumably has increased due to higher military fuel requirements, and exports 5 million to 6 million barrels per day. Today Russia is the second-largest crude oil producer in the world, behind the U.S. and ahead of Saudi Arabia, but sometimes that order shifts.
About half of Russia’s exported oil – roughly 2.5 million barrels per day – is shipped to European countries, including Germany, Italy, the Netherlands, Poland, Finland, Lithuania, Greece, Romania and Bulgaria. Nearly one-third of it arrives in Europe via the Druzhba Pipeline through Belarus. These 700,000 barrels per day in pipeline shipments would be an obvious target for some kind of sanctions, either by banning financial payments or refusing deliveries via spur lines at the Belarus border.
In 2019, European stopped accepting deliveries for several months from the Druzhba line when crude oil flowing through it became contaminated with organic chlorides that could have damaged oil refineries during processing. Russia’s oil shipments fell noticeably as it redirected flows to avoid the Druzhba line.
The remaining export shipments of Russian crude oil to Europe come mainly by ship from various ports.
China is another large buyer: It imports 1.6 million barrels per day of Russian crude oil. Half comes via a special direct pipeline, the Eastern Siberia Pacific Ocean pipeline, which also services other customers via a port at its end point, including Japan and South Korea.
How would Russia be affected if other nations reduce imports of its oil?
Sanctions against Russia’s oil industry would have a greater impact than limiting natural gas flows because Russia’s oil receipts are higher and more critical to its state budget. Russia earned over US$110 billion in 2021 from oil exports, twice as much as its earnings from natural gas sales abroad.
Since oil is a relatively fungible global commodity, much of Russia’s crude exports to Europe and other participating G-7 countries might wind up being sent somewhere else. That would free up other supplies from sources such as Norway and Saudi Arabia to be redirected back to Europe.
Russia’s oil has high sulfur and other impurities, so refining it requires specialized equipment – it can’t be sold just anywhere. But other Asian buyers can take it, including India and Thailand. And Russia has special supply arrangements with countries like Cuba and Venezuela.
It’s already clear, though, that Russia is having trouble redirecting its crude oil sales. At the start of the invasion of Ukraine, European refiners began shunning spot cargoes for fears that sanctions might be forthcoming.
India bought Russian crude cargoes that were already at sea, at a sharp discount. Markets would likely respond to a G-7 oil ceiling by further discounting Russian crude. We saw the same pattern in the past when countries sanctioned Venezuelan and Iranian oil: Those nations still found buyers, but at reduced prices.
Can European nations get oil from other sources?
Oil shipments are arguably easier to reroute than natural gas, which has to be super-chilled to liquefy it for ship transport, then converted back to gas at its destination port. That means Russia’s crude oil may potentially be easier for European countries to replace and reroute than its natural gas, which relies more heavily on pipeline delivery, depending on market conditions.
To ensure replacement barrels are available, Europe and the U.S. could simultaneously increase crude oil sales from their national strategic stocks to lessen the blow of any restrictions on Russian crude oil imports to the G-7. The U.S. is already selling 1.3 million barrels per day from its Strategic Petroleum Reserve, and it could increase these flows. China has also released oil from its national strategic stocks to help ease oil prices.
The U.S. and other G-7 members would also likely ask Middle East countries to relax destination restrictions on their crude oil shipments and press countries like China and India to redirect other oils of similar quality to Russian oil back to Europe if and when they increase their purchases from Moscow. Such steps would lower the chances of G-7 restrictions on Russian oil imports raising global prices.
It’s not certain that China and India would cooperate, but it would be in their interests to do so. They are major oil importers and would not want to see higher crude oil prices.
Odd Anderson/AFP via Getty Images
How would global oil prices be affected if G-7 nations buy less Russian oil?
It would depend on what other steps governments take in response to rerouting of Russian oil exports. Nations are already acting to prepare global markets for shifts in liquefied natural gas flows in case of reduced purchases from Russia.
G-7 energy diplomacy is likely to involve other oil capitals that might be willing to export more oil to alleviate disruption of crude oil sales from Russia. Most exporters are maxed out in terms of crude oil production, but a few of the largest Middle East producers could surge their output in the short term to put an extra 1 million barrels per day or more onto the market.
U.S.-Saudi relations could face a test. Riyadh has access to large stores of crude oil in its vast global tank system and its tankers that float at sea. In 2014, when Russia invaded Crimea, U.S. allies in the Persian Gulf held over 70 million barrels in storage near Fujairah in the United Arab Emirates. They did this as a threat to Russia that a price war would ensue if Russian troops moved beyond that peninsula. Russia stayed in Crimea, so the oil was not released.
Saudi Arabia has instituted price wars that hurt Russia’s economy in 1986, 1998, 2009 and again briefly in 2020. But today’s oil market conditions make a price war an unlikely outcome, given the existing tight balance between supply and demand. The only scenario that could trigger a price war now would be if global demand were to contract suddenly because of a recession.
Amy Myers Jaffe is Research professor at the Fletcher School of Law and Diplomacy, Tufts University.
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Shamed says
Today Russia is the second-largest crude oil producer in the world, behind the U.S. and ahead of Saudi Arabia, but sometimes that order shifts.
As stupid as Biden is, America must buy oil from countries that want to kill us. Great job Brandon
Dennis C Rathsam says
We have more oil & natural gas, in this country. But the moron thats running this country is listening to a N.Y bartender, & her so called Squad….Green energy is a good thing, but we do not have the support systems in place to make it work yet. Too many of us depend on gas, for our cars & to heat our homes. This should have mixed in with the green deal, so Americans didnt suffer. But as history shows Biden has been on the wrong side of every deceision he has made. His approval rating is in the toilet, Americans see he in way over his head…The whole world is suffering now with Russia,s invation. Millions will be killed, and the leader of the free world has blood on his hands, & no idea what to do! But wait… the cavelry,s comming!!!! Come Nov. after the biggest landslide, in political history! Biden will be muted once and for good.
Ray W. says
Once again, Dennis C. Rathsam takes on the role of the gullible among us. For many decades, we have consumed more crude oil than we produce. Currently, America produces over 11 million barrels of crude oil per day (bpd). We consume distillates (gasoline, diesel fuel, plastics, kerosene, and many other refined products) from approximately 20 million bpd. The United States have never produced 20 million bpd.
At the end of W’s administration, we produced 5.1 million bpd. During the Obama administration, that figure rose to as high as 9.8 million bpd. During the Trump administration we broke the 13-million-barrel marker. But market prices drove the increases in drilling for American crude oil. When prices drop, American energy companies slow their production of crude oil. During my childhood, whenever we traveled through the Midwest, my father would comment that the economy was strong when we drove past working oil wells. When the derricks were not moving, he would comment that the economy was weak. President George W. Bush gambled wrong on the future of the American energy markets and lost a couple of energy companies early in his adult life.
As the entire world recovered from the 2008-11 recession, demand for crude oil surged. Oil prices broke $100 per barrel early in President Obama’s second term and almost every drilling rig in America was hired by American energy companies to drill for more oil. I recall reading several articles about California farmers being unable to find drillers to drill deep in the aquifer for more water for their crops because almost all of the rigs were scheduled to drill in North Dakota. North Dakota production figures rose from around 100,000 bpd to well over 1 million bpd in just a few years. We drilled so fast and added so much to the world’s supply of crude oil that market prices plummeted to below $30 per barrel. I recall purchasing gasoline at BJ’s for $1.49 during that year’s glut, but only once. The price went back over $1.50 per gallon shortly after that. I used to call a friend of mine who voted against Obama both times to tell him that gasoline prices had dropped once again at BJ’s, and to jokingly tell him that President Obama’s energy policies were working. Both of us knew that was just joking; each of us knew that international market supplies drove energy prices.
Many commenters like James C. Rathsam erroneously believe that free markets always determine crude oil prices. Crude oil is an international commodity. In February of last year, the 13 OPEC members voted to cut crude oil production by six million barrels per day. Saudi Arabia voluntarily cut another one million barrels per day from its available production capacity. That took just over 7% of the world’s production figures off the table. Last April, OPEC voted to bolster its group crude oil production figure by 400,000 barrels each month, meaning that it will take 15 months from that date for OPEC to return to its prior level of production. The worldwide shortage of crude oil is a result of a vote by OPEC, ostensibly to force a rise in market prices that would benefit each OPEC nation. This morning, OPEC turned down a proposal to increase its production levels, which would have helped alleviate prices paid by consumers all around the world.
I have repeatedly commented on various articles that report on the efforts by investors in American energy companies who are pressuring the companies to refrain from drilling for more oil. I recently commented on a statement by the CEO of one of America’s larger energy companies; he commented that even if crude oil hit $200 dollars per barrel, his company would not deviate from its plan to increase crude oil production by 5% this year.
It seems that the more reasonable conclusion to be drawn from the current worldwide crude oil shortage is that American energy companies and OPEC nations have chosen to pad their bottom lines and treasuries at the expense of Dennis C. Rathsam and the rest of us. Since a significant portion of this country’s citizens are gullible enough to blame President Biden for the decisions made by OPEC and many of America’s energy companies, it seems that the OPEC nations and some of America’s energy companies have gambled without any cost to themselves. It is always beneficial for a foreign nation or an American energy corporation to gouge the public if either or both can deflect blame onto the wrong target. After all, they get to keep the money without receiving any of the blame for their decisions.
Dennis C. Rathsam and Shamed are part of the problem. Gullibility can be cured. All it takes is the exercise of a little intellectual rigor. The northern leg of the XL pipeline is a political issue. Canadian oil can flow west to Vancouver as easily as it can flow to Houston. It can flow east to Montreal as easily as it can flow to Houston. Pipelines do not have to flow to Houston. There are major seaports in Vancouver and Montreal that can be modified to handle the newer model supertankers that have been built in response to the newly widened and deepened Panama Canal. There can be no debate about the fact that the shipping distance from Vancouver to Japan and the shipping distance from Montreal to Europe is far shorter than the shipping distance from Houston to either Japan or Europe. Remember, the southern leg of the XL pipeline has been open for years and is filled with North Dakota crude oil. If the northern leg were to be built, a second southern leg would also need to be built in order to keep North Dakota oil flowing by pipeline to Houston.
Thank goodness Jimbo99 hasn’t chimed in with a comment yet. One can infer that he is exercising a little intellectual rigor on this point. One can also infer that he knows that crude oil is an international commodity, and that President Biden cannot order American crude oil companies to drill for more oil, just as he cannot order OPEC to produce more oil. I have long known that Jimbo99 possesses the capability of producing high quality comments; he just goes off the rails every once in a while.
Timothy Patrick Welch says
Countries that produce things need resources, fortunately Russia and America are countries with abundant resources.
Only when the “market” dictates we as a country are ready to move away from fossil fuels will that happen, the Federal government should worry about our security and protection. (which relies on fossil fuel), and leave the details to the free market.