The most effective economic weapon that the West has in its arsenal to retaliate against Vladimir Putin for his unprovoked attack on Ukraine is a boycott of Russia’s oil.
It’s also the one that U.S. President Joe Biden and his allies can’t afford to use.
On Thursday, Russia’s invasion of Ukraine propelled oil prices above US$100 a barrel for the first time in almost eight years as traders weighed the potential of the conflict to cause severe supply disruptions in Europe and beyond.
The risk now is that prices will go even higher. Crude prices were already set for more gains as the globe’s recovery from the pandemic-induced slowdowns keeps demand on the rise, pushing inflation to even more painful multidecade highs.
With inventories tight, the world can ill afford the loss of 4.3-million barrels a day of exports from the third-largest producing country, despite its aggression. Even before the attack, Russia struggled to meet its own OPEC+ commitments to increase output.
Mr. Biden said the initial tranche of sanctions is aimed at causing long-term impact to the Russian economy while minimizing damage to the U.S. and its allies. They will restrict Russia’s ability to conduct business in major Western currencies, including U.S. dollars and euros.
Other measures include sanctions against Russian banks, a series of controls to prevent the country from importing semiconductors and other technology, and new restrictions on state-owned enterprises raising money from U.S. and European investors.
These are serious economic penalties, but not knockout blows as Russian tanks and troops roll into Ukraine. Oil and gas exports account for nearly 60 per cent of Russian exports, so pinching off energy shipments would inflict the most damage. From an oil standpoint, it’s something that would be far too costly for the world, no more so than in the United States.
This energy predicament had its beginnings in the early COVID-19 lockdowns in March and April of 2020. As cars and planes were parked, demand for fuel plummeted. At the time, analysts wondered if the volumes of crude turned away at refinery gates would fill storage facilities to their physical limits. At one point, West Texas Intermediate oil futures went negative.
The price plunge squelched cash flow in the industry, prompting companies to scale back drilling to preserve their balance sheets. Since then, however, economic growth has returned, pushing up energy demand. Now, Western oil companies and members of the Organization of the Petroleum Exporting Countries are struggling to keep up.
Global benchmark Brent crude climbed as high as US$105.77 on Thursday. But all the fundamentals had pointed to a lengthy boom in prices even before Russia’s invasion gave the market a jolt, says Michael Tran, managing director of global energy strategy at RBC Capital Markets.
“Geopolitics has really helped to ignite the constructive view of prices, but it has also lifted the hood – when we look around to see where the additional supply is going to come from, it’s materially tighter than we’ve seen any time in almost 15 years,” Mr. Tran said.
OPEC inventories have dwindled, and U.S. and Canadian oil companies are hamstrung in their capacity to increase production. Late last year, Mr. Biden ordered the release of crude from the U.S. Strategic Petroleum Reserve as a way to tame prices. U.S. oil fell briefly, but has been on a solid upward path since the beginning of December, rising 43 per cent. The U.S. and its allies are now considering another release of strategic reserves.
Before the pandemic, U.S. shale-oil producers could be relied upon to boost output, but investors grew weary of funnelling capital into the sector with poor returns. Now, despite rising prices, companies are keeping production growth in check while paying down debt, instituting share buybacks and raising dividends.
Canadian producers are also boosting payouts and buying back shares, pleasing shareholders who suffered through more than seven years of weakness. That has pushed stock prices to multiyear highs. In a break from years past, when overbooked pipelines limited exports, the industry has little spare capacity for a short-term boost in output.
Higher oil prices may prompt some exploration and production companies to consider fattening their capital spending budgets, but oil field service providers are dealing with staff shortages, restricting their ability to pile on new work, says Robert Fitzmartyn, head of energy institutional research at Stifel FirstEnergy. Meanwhile, oil sands companies are not proposing major new projects.
It all shows that oil was a clear and present danger for the global economy before the attack. If used as a cudgel against Russia, it’s certain there would be substantial damage on both sides.
The Globe and Mail
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