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OpEdNews Op Eds    H2'ed 3/12/22

The New World Order: Oil

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The February 24th Russian invasion of Ukraine has ushered in a dangerous new world order. In response to Vladimir Putin's intent to obliterate Ukraine, the US has formed a global coalition to isolate Russia. Crippling economic sanctions have been levied on Russia. This has impacted the price of oil.

Russia: Two weeks into the invasion, it's clear that Putin made two miscalculations: he underestimated Ukrainian resistance and the strength of the NATO coalition. Now Russia is suffering from severe sanctions: their participation in the global banking system has been curtailed; Internet connectivity has been throttled; assets of Russian oligarchs have been seized; and sales of fossil fuel have been restricted. In this article, I discuss the oil-related sanctions.

Russia has the 11th ranked economy in the world. (In 2021, $1.70 trillion GDP.) The US economy is number one ($22.99 trillion in 2021); by the way, California's economy is number five ($3.35 trillion in 2021). Compared to the United States, Russia's economy is unsophisticated. It is unusually dependent upon fossil fuel exports. ("Crude oil, petroleum products and natural gas comprise roughly 58% of total exports... Sales to Europe represent over 60% of total exports while Asia has an export share of roughly 30%. Russian exports to the United States, Africa and Latin America combined represent less than 5% of total shipments.")

While Russia is the third largest oil-producing country -- behind the United States and Saudi Arabia -- it is the number one oil exporter. According to the Washington Post (Click Here) "[Russia] consumes about 3.45 million barrels a day while exporting more than 7 million barrels of crude oil and other petroleum products a day." 4.8 million barrels go to the West; that is, countries that are supporting sanctions. Of the remaining 2.3 million barrels, by far the most, 1.6 million barrels, goes to China.

European Union: The Washington Post noted: "In the year ending in October, Russia supplied about a quarter of all oil imported by the European Union." The countries most dependent on Russian oil are Slovakia, Poland and Finland. About 32 percent of German oil comes from Russia.

As the results of economic sanctions, some of these oil deliveries have ceased. Nonetheless, when the EU hit Russia with economic sanctions, it left open a portal in order to pay for oil. (Click Here) For example, the EU continues to transfer funds to Sberbank.

In leaving open this financial conduit, the EU is betting that the war in Ukraine will be short-lived and, therefore, they can withstand criticism for "financing Putin's war" and continue receiving Russian oil they depend on. At the moment, it appears the war will drag on and reports of Russian atrocities will mount. As a result, there will be increased pressure on the EU to shut off Russian oil. (Or, Vladimir Putin may react to the impact of the other economic sanctions and retaliate by cutting off deliveries .) Writing in the Atlantic (Click Here), Tom McTague noted: "Each and every day for now, Russia receives $1.1 billion from the EU in oil and gas receipts, according to the Brussels-based think tank Bruegel. In total, oil and gas revenues make up 36 percent of the Russian government's budget." [Emphasis added.]

On March 9th, The European Union (Click Here) announced a proposal to cut reliance on Russian oil by two-thirds. "In the short term, the plan envisions that Europe would secure liquefied natural gas supplies shipped from elsewhere around the world."

The big question is, "If the EU does not buy oil from Russia, where will it come from?"

World Oil Supply: The United States is the world's largest oil producer, but we use most of our production. We rank seventh in oil exports. The major exporters are: United Arab Emirates (UAE), Saudi Arabia, Russia, Kuwait, Iraq, Canada, USA, Nigeria, Mexico, and Norway.

About 20 percent of Germany's gas comes from Norway, via an undersea pipeline. This source is said to be running at capacity and is not capable of providing more in the near future. The implication is that, if Russia shuts off the oil spigot, the EU will need to be supplied by Arab states such as UAE, Saudi Arabia, Kuwait and Iraq. Early indications are that these countries will stick to the Organization of Petroleum exporting countries (OPEC) plan. [The members of OPEC are: Algeria, Angola, Congo, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela.] This plan advocates conservative production increases -- because many of these nations do not want to offend Russia. (Click Here ) They have no intention of replacing the missing Russian gas, cheaply.

The United States has begun negotiations with Saudi Arabia. The Wall Street Journal (Click Here ) reported the Saudis resist increasing production: "They want more support for their intervention in Yemen's civil war, help with their own civilian nuclear program as Iran's moves ahead, and legal immunity for Prince Mohammed bin Salman in the U.S."

The United States has also begun negotiations with Venezuela (Click Here). It's too soon to tell what will result from these talks.

The reality is that if Russia shuts off the oil spigot, the EU will be in a world of hurt. They will have to find other fossil-fuel sources, and they will be expensive. (OPEC, and many multinational oil companies, view the Ukraine War as an opportunity to make money.)

Inflation: The Biden Administration has banned Russian oil imports (about 3 percent of our oil use). This ban will increase the price of gasoline, a major component of rising inflation.

US Inflation has risen by 7.9 percent, a forty year high. (Click Here ) There are several components of this increase but the primary one is energy (Gasoline and electricity). (Click Here )

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Bob Burnett is a Berkeley writer. In a previous life he was one of the executive founders of Cisco Systems.
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