As oil prices shoot to levels unseen since before the 2008 financial crisis, the energy industry is asking a previously unthinkable question: How would it cope if it has to forgo Russian oil?
Crude prices shot close to $140 a barrel, grain prices leapt and industrial metals rallied Monday as war in Ukraine and the West’s response threatened to hit supplies of commodities that underpin much of the world economy. The surge builds on weeks of gains for raw materials and stands to add to inflationary pressures ripping through the world economy.
The jump in commodity prices followed a weekend statement by Secretary of State Antony Blinken that the U.S. and European partners were discussing a ban on Russian oil imports. If enacted, an embargo would mark a significant change in the West’s response to Moscow’s war on Ukraine. Washington and allies have imposed punishing sanctions on Russia’s financial system and elite, but have so far skirted energy exports for fear of pushback from voters over gasoline and heating bills.
The change signals a newfound willingness to absorb higher energy costs by politicians on both sides of the Atlantic. “The political calculation is that any dislocation…is a better outcome than handing that money straight to Moscow,” said Paul Horsnell, head of commodities research at Standard Chartered.
Oil traders braced for immediate disruption in energy markets if Western companies are ordered to eschew oil from Russia—the world’s third-biggest producer after the U.S. and Saudi Arabia—and find alternative supplies.
Futures on Brent crude, the international benchmark, jumped 5.4% to $124.51 a barrel and earlier hit $139.13 a barrel, their highest level since a boom in China’s economy lifted commodity markets in 2008. U.S. marker West Texas Intermediate traded 6% higher at $122.59 a barrel.
Before the war, Russian exports of crude and refined products met about 7.5% of the world’s oil demand. But after President Vladimir Putin invaded Ukraine in late February, many refiners hit pause on imports. They struggled to find funding and tankers for cargoes of Russian oil, and feared reputational damage as well as sanctions on the crude down the line.
The U.S. is far less dependent on Russian energy than Europe, but about 8% of its imports of crude and refined products came from the country last year. If a ban were imposed, refiners will struggle to find alternative supplies of vacuum gas oil and fuel oil, which U.S. refiners process into gasoline.
The challenge in Europe and the U.S. could be addressed by reshuffling flows of oil around the world. Europe would buy more crude from the North Sea, West Africa and the Middle East to replace lost barrels.
There is little slack in the oil markets, however, and shifting demand from one place to another isn’t simple, notes Amrita Sen, founding partner at Energy Aspects, a consulting firm.
Supplies of oil were running low before war broke out, as demand recovered from pandemic lows. In December, commercial oil stockpiles in the Organization for Economic Cooperation and Development stood at 2.68 billion barrels, according to the International Energy Agency, their lowest level in seven years.
Write to Joe Wallace at [email protected]
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