Russia’s attack on Ukraine continued to have wide reaching effects on the energy market Monday morning. Oil prices rose again after more Western nations imposed additional sanctions on Russia. Corporations are taking action too: energy giant BP announced it was abandoning its stake in Russian energy company Rosneft at a cost of about $25 billion.
Still, while the Biden administration has levied sanctions on Russian financial institutions, their energy exports have remained exempt. Given oil’s massive role in the Russian economy, the move to spare the sector from sanctions has some critics, says Matt Smith, lead oil analyst for the Americas for Kpler.
Listen to the interview above or read the transcript below.
This transcript has been edited lightly for clarity:
Texas Standard: I know there are a lot of moving parts, but give us a quick summary of why Russia is so important when we’re talking about the global energy market and particularly as far as Europe is concerned.
Matt Smith: Russia is one of the largest natural gas and oil producers in the world, and when it comes to Europe, Europe is the biggest recipient of these flows. So it relies on Russia to meet 40% of its natural gas needs, 25% of its oil supply. So that’s why this war is so complex. Because Europe is wanting to punish Russia for invading Ukraine while still receiving its oil and gas. At the same time, Russia’s economy is hugely reliant on on its oil and gas industry. They’re the leading elements of the country’s export revenues, and they play a key role in its GDP as well.
Well, given how important the energy sector is to Russia and its economy, I think a lot of people were struck by the fact that Western sanctions have not specifically targeted energy. What’s your take on why the U.S. in the West are not specifically applying sanctions to Russia’s energy sector, given that it could at least theoretically be an Achilles heel.
It’s simply because of those flows – just because Europe is so reliant, they just cannot do without all of that natural gas and all of that oil. And so that’s where Europe is coming from.
At the same time, obviously the U.S. doesn’t want to do something that’s going to hinder supply to millions of people. But at the same time to, the U.S. administration doesn’t want to increase oil prices. We’re knocking on the door here of $100 a barrel, pushing higher. And so their concern is twofold. They have a concern for Europe, but at the same time, whether that high oil price could drive us into a recession.
What about energy flows from Russia to the U.S.? Is that a thing? Is that something that that actually happens or no?
It is. And so given how interconnected the world is, believe it or not, the the U.S. imports about 400- to 500.000 barrels per day of Russian oil and products. So that isn’t just crude oil. That makes up part of it, but we also are pulling in fuel oil, gasoline, diesel, all manner of different things. And so even though U.S. oil production has been ramping up and we’re much less reliant on the rest of the world than we were, say, 10 years ago, we’re still pulling in these products.
Let’s say that the West that the U.S. were to start targeted sanctions on energy. Could the U.S., could Europe get by, muddle through as it were without those Russian supplies? And what would that scenario look like?
Europe couldn’t do it, really. So they could meet some of their supply needs and they could pull from the U.S., they could pull from elsewhere in the world. But in terms of natural gas, they do receive LNG and they’re pulling in a record amount of that. But they can only process so much of that LNG every day. And so because of that, there isn’t an alternative they can switch to and that’s why they’re in such a predicament. And so they need those natural gas flows because without them, they don’t have an adequate replacement from renewables, from nuclear or from imports from elsewhere.
Well, let’s bring this back home. Is it simple enough or accurate enough to say these world events are probably good for Texas oil producers and bad for consumers when it comes to prices at the pump? Or is it more complicated?
No, that’s fair, because in terms of oil production, high oil prices are going to encourage higher production. We’re already seeing strong growth expected from the Permian Basin this year. But in terms of the gasoline prices, we’re already at 7.5-year highs here, so that the average price in Texas is $3.28 a gallon.
We saw a record back in in the summer of 2008, and we could quite easily retest those levels here in the end of May, something like that, if all prices remain elevated. Now the concern with that is that if we do get to that price on the gasoline side of things that could precede some type of demand destruction, or potentially even a recession. So that’s that’s the the downside of all of this.