By Chris Helman and Maria Abreu
President Joe Biden on Tuesday announced a ban on U.S. imports of oil from Russia. America, said Biden, “will not be subsidizing Putin’s war.” This retaliatory move against Russian President Vladimir Putin, comes after the pleading of Ukrainian President Volodymyr Zelensky. Meanwhile, bipartisan Russia bans have been advancing in Congress that would have appeared to force Biden’s hand.
The president had previously said that he wanted to resist banning Russian oil out of a desire to limit motorists’ pain at the pump. Today’s national average gasoline price is $4.17 a gallon, versus $2.77 a year ago, according to the AAA. “There will be costs,” Biden assured the country today.
Russian petroleum last year made up about 2% of total U.S. imports — that might not sound like a lot, but still comes to 700,000 barrels per day. To replace it, U.S. refiners will increasingly rely on imports from Canada, plus a slow ramp up of onshore drilling in the U.S.
Biden has been asking OPEC for more oil for months. Over the weekend administration officials made a surprise visit to Venezuela, which the White House on Monday said was about discussing “energy security” — and ostensibly to explore the possibility of relaxing sanctions on Venezuelan crude oil as a Russian replacement. The move triggered senators like Florida Republican Marco Rubio and Democrat Bob Menendez of New Jersey, who criticized the notion of “propping up a dictator” in Caracas, in order to undermine a “murderous tyrant in Moscow.”
Ironically, American refiners had been increasing their purchases of Russian oil in order to replace Venezuelan supplies, banned since the Trump administration imposed sanctions on the Maduro regime in late 2018.
“Venezuela can’t contribute much, its oil industry is destroyed,’’ José Toro Hardy, a prominent Venezuelan economist told Forbes. By Toro Hardy’s figuring, it would take about $250 billion of investment and seven to eight years to bring Venezuela’s production back to its former levels.
Venezuela’s oil industry has been decimated by decades of malinvestment. Twenty-five years ago national oil company PDVSA was exporting 3 million barrels per day. Today, according to OPEC data, Venezuela’s oil output is down to just 668,000 bpd. This from a country with more than 300 billion barrels of proven reserves, the most in OPEC. “Major foreign investment is needed, and it can’t reach the country if the country can’t commit to restoring democracy,’’ Toro Hardy says.
Venezuela is tapped. Nigeria is in decline. Saudi Arabia ambivalent. OPEC in recent months has already fallen short of its self-imposed schedule for adding supplies back to the market post-pandemic. America’s shale oil frackers have even been slow to mobilize drilling rigs — after years of boasting that they were the new “swing producer.” If countries or companies don’t find any more oil to pump at these record prices, they must not like money.
Crude oil cassandras are already predicting more pain ahead. Billionaire investor Jeff Grundlach of ValueLine, yesterday predicted stagflation and $200/bbl oil this summer, and said Biden administration entreaties are an acknowledgment that we are very low on attractive solutions. Grundlach said he likes cash and is buying 30-year treasury bonds and shifting from U.S. equities into emerging markets.
Dept. of Energy data shows that at the end of February imports of Russian oil had already fallen to zero, amid a voluntary embargo enacted by refiners like Valero Energy, and Par Pacific. America has more than a month of oil in inventories. And millions of barrels are being released from the Strategic Petroleum Reserve. Senator Dick Durbin (D.-Ill.) was skeptical of banning such a relatively small portion of oil imports, “I think we need to make sure the people in the oil industry aren’t using this crisis to raise their profits.” As if on cue, Senator Bernie Sanders (I-Vt) on Monday called for a “windfall profits tax” on oil companies that “continue to take advantage of the war in Ukraine and inflation to make huge profits by jacking up gas prices.”
The Russian oil won’t go to waste — with benchmark Brent crude trading at $132/bbl this morning, there are hefty profit margins even in selling discounted oil to countries that can’t afford to be bothered by its origins. Ed Hirs, a lecturer in energy economics at the University of Houston, says the price elasticity of oil demand is such that if all of Russia’s 7 million bpd of exports were taken off the market, the resultant price spike would push the price up to $300 per barrel before the system broke — ushering in global recession and demand destruction. No, says Hirs, black market Russian oil will continue to flow to China and India and Azerbaijan. “It will just stop flowing directly to Europe.”
European governments have so far resisted outright bans. “We’re moving forward with this plan understanding that many of our European partners may not be able to join us,” Biden said today. “We’re a net exporter of energy, we can take this step while others cannot.”
Social pressure is already leading to de facto Europe bans. Shell saw outrage erupt last weekend when news emerged that it had purchased a cargo of Russian crude oil at a $28/bbl discount. Shell argued that it needed that particular grade of oil because its European refineries were optimized for it.
Condemned for supporting Putin’s war effort, Shell has since announced it would close 500 stations in Russia, exit its long-sought Sakhalin II LNG project, and would donate the profits from that Russian cargo to Ukrainian refugee charities. In a statement, CEO Ben van Beurden said that he had been having discussions with European governments about what will become the conundrum of the year: how to “disentangle society from Russian energy flows, while maintaining energy supplies.”