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Looming Oil Crisis

Context:

Recently, United States President announced a ban on all crude oil and natural gas imports from Russia into the US even as the Ukraine conflict intensified, while the UK announced that it would phase out imports of Russian oil by the end of the year.

  • These moves will further increase crude oil prices, which in turn will stoke inflation across the world — particularly in the US and its allied nations in Europe, which are already reeling from inflation rates that are at their highest in decades.
Relevance:

GS II- International Relations

Dimensions of the Article:
  1. Why were oil prices rising even before the Ukraine crisis?
  2. How big a player is Russia in the global oil market?
  3. Can strategic reserves not help meet the gap?
  4. Is there a difference in the dependence of the US and its European allies on Russian energy imports?

Why were oil prices rising even before the Ukraine crisis?

  • Crude oil prices have fluctuated quite sharply over the last two years.
  • From $60 a barrel at the start of 2020, they fell to less than $20 in April 2020 owing to a supply glut in the wake of the pandemic.
  • Since then, however, they have been steadily rising even before the Ukraine conflict caused them to skyrocket.

On the supply side, there were many factors further contributing to this gap, These included:

  • Russia has been holding back from providing additional supplies of natural gas to Europe. As the price of gas shot up, so did the price of oil as consumers shifted from gas to oil and coal.
  • Continued underinvestment in oil and gas exploration because of the “public and regulatory aversion” to fossil fuels.
  • There is very limited “spare capacity” within the OPEC (Organization of the Petroleum Exporting Countries).
  • Only Saudi Arabia and UAE have spare capacity and they are refusing to play along.

How big a player is Russia in the global oil market?

  • There are three large players in the global oil market.
  • At 18%-19%, the US has the highest share in global output followed closely by Russia and Saudi Arabia, each with a 12% share.
  • Within OPEC, it is Saudi Arabia that dictates.
  • Together, these three control almost 45% of all oil.
  • Russia’s share in global exports is around 12% and is the world’s second-largest producer of oil as well as the second-largest exporter.
  • Russia supplies close to 5 million barrels a day to the global market and that is not an insignificant amount and a ban will immediately tighten the market further

Can strategic reserves not help meet the gap?

  • Strategic reserves are good enough for emergencies. The top three countries in terms of such reserves are the US, China and Japan.
  • Between them, they have 1500 million barrels.

Oil includes crude, all other petroleum liquids, biofuels. Source: International Energy Statistics via US Energy Information Administration, as of December 2021

Can’t there be increased supplies from countries such as Venezuela and Iran?

Venezuela:

  • Venezuela has the world’s largest oil reserves but producing oil requires more than just reserves.
  • The country’s oil-producing apparatus is in disrepair partly due to the government’s mismanagement but also because of harsh US sanctions.
  • Oil-producing companies are in debt and most don’t even have good quality drilling equipment.

Iran

  • Iran will not increase output unless it gets the nuclear deal with the US.
  • Production can be scaled up but it will take time, money and effort.
  • Moreover, since individual production levels are quite low, several countries will have to come together and still they may not come anywhere close to matching the levels that Russia produces.

Is there a difference in the dependence of the US and its European allies on Russian energy imports?

  • There is a big difference and that is what explains why the reactions of the US, the UK and the EU vary.
  • The US imports less than 10% of its energy requirement from Russia but European countries are much more heavily dependent on Russia.
  • For example:
    • Germany, which is not just the most-industrialised economy but also the biggest decision-maker in the EU.
    • While Russia accounts for 12% of all global exports of oil, in Germany it is a much bigger player, accounting for over 40% of that country’s oil needs.
    • Similarly, Germany is also hugely dependent on Russian natural gas.
    • Unlike India, which gets most of its energy from coal (75%) and oil (10%) and very little from natural gas, Germany gets 25% from natural gas — again hugely imported from Russia.
    • Even if other countries were to come to Germany’s rescue by providing LNG, there will be a problem since Germany has no LNG terminals; it is completely dependent on natural gas pipelines from Russia.

-Source: Indian Express

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October 2022
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