Looming Oil Crisis: What Now?

Looming Oil Crisis: What Now?

U.S. President Joe Biden announced a ban on all crude oil and natural gas imports from Russia into the US, while the UK announced that it would phase out imports of Russian oil by the end of the year.

Why were oil prices rising even before the Ukraine crisis?

• Crude oil prices have fluctuated quite sharply over the last two years in the wake of the pandemic.
• From 60 dollar a barrel at the start of 2020, they fell to less than 20 dollar in April 2020 owing to supply chain constraints.
• Russia has been holding back from providing additional supplies of natural gas to Europe.
• Continued underinvestment in oil and gas exploration because of the public and regulatory aversion to fossil fuels adds to the issue.
• There is very limited spare capacity within the OPEC.

What about alternatives:

• Issue of quality: unlike Russian oil, Venezuela oil has more impurities and it requires a more complex type of refineries.
• Cost of production- The individual country’s cost of production also plays a key role.
  Most oil fields in the US produce at 40 dollar a barrel, while those in Russia produce at around 20 dollar and those in Saudi Arabia at around 15 dollar a barrel.

• Russian supplies are not only the second-biggest, they are also the second-cheapest and of better quality than what a replacement like Venezuela may provide.

What are the challenges in meeting the gap created by Russia’s ban:

• Strategic reserves are good enough only for emergencies.
• The top three countries in terms of such reserves are the US, China and Japan which have around 1500 million barrels. At an average daily global consumption of 95 million barrels a day, that’s roughly 20-odd days of oil.
• It is an open question how far China will share globally.
• Venezuela has the world’s largest oil reserves but the country’s oil-producing apparatus is in disrepair due to the government’s mismanagement and harsh US sanctions.
• Also, oil-producing companies in Venezuela are in debt and most don’t even have good quality drilling equipment.
• Iran will not increase output unless it gets the nuclear deal with the US.

Way forward:

• 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.
• Scaling the production will take time, money and effort.

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