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Russia’s February 24 invasion of Ukraine provoked a global uproar and nearly simultaneously, a robust and immediate response. Leaders of countries, organizations, and firms not only condemned the death and devastation wreaked by Russia on Ukraine, a neighbor that has been independent since 1991. Led by the EU and US, countries followed up with a blizzard of sanctions and boycotts on Russia, alongside diplomatic support and shipments of aid and weapons to Ukraine.
While initial state-issued sanctions avoided direct targeting of Russian energy exports, private sector reluctance to do business in an uncertain and rapidly changing environment is reducing Russia’s participation in global oil and gas markets in any number of ways, with repercussions occurring over the short- and longer-term. Despite the intention of the US and EU to avoid a sanction-induced energy shock to the global economy by allowing sanction-free exports of oil and natural gas, global oil prices have risen substantially as have natural gas prices in Europe and the Far East.
Ultimately, the invasion threatens to undermine Russia’s longer-term position as the world’s No. 2 oil producer and exporter.
With oil being by far the world’s leading source of energy, Russia is a crucial cog in the global economy. It has long been understood that Russia’s status as major oil and gas exporter—and a major nuclear weapons state—insulated it from serious reprisals over Moscow’s aggressive foreign policy. After February 24, however, the harm caused by Russia’s invasion was weighed against the important contributions of Russian energy exports to the world economy. Widespread perceptions held that Moscow had gone too far.
Importers of Russian energy commodities appear to be resigned that trade engagement and diplomacy have not moderated Russian behavior and are now opposed to Russian use of their energy payments to fund government and military budgets. Several importers of Russian commodities signaled a willingness to undergo the long and painful process of reducing dependence on Russia.
Russia’s previous willingness to leverage its exports to constrain importers’ freedom of action in foreign policy has been demonstrated at least three times. The EU experienced natural gas cutoffs in 2006 and 2009, and Gazprom began withholding gas shipments from the EU again in late 2021.
Oil shipments, the subject of this paper, began faltering in early March 2022 largely due to reluctance by trading and shipping firms in the face of growing risk perceptions, and as of this writing are estimated to have fallen by one-third, or about 2.5 million barrels per day (Mb/d). Further disruption directed by Moscow—rather than its trading partners—or of flows through war-torn Ukraine also cannot be ruled out. Nor can it be ruled out that in a world of fungible oil, a daisy chain of trades allows additional Russian oil to find a way back into the market, albeit probably at healthy discount to other crudes.
In short, the February invasion catalyzed dissatisfaction with trade dependence on Russia into action. Until the Ukraine invasion, Russian activism in the region attracted diplomatic protests and mild sanctions from the EU and its Western allies. The attack on Ukraine signals a new era, whereby import ties with Russia are being re-examined to eliminate or reduce funding ties that could support the Russian military and unwind so-called “dependence” constraints on importing country foreign policy.
Opposing Russia’s war may eventually mean that policymakers seek to reduce—or even reverse—long-running ties to Russian natural resources. The sheer magnitude of Russia’s oil exports means that there can be no easy offset in the event of a full outage. Commercial inventories are below the recent historical range. In theory, spare oil producing capacity in OPEC and strategic stocks could fully offset a loss of Russian supplies. But strategic stocks would be quickly depleted, and Saudi Arabia and other countries with spare production capacity may be reluctant to tap their surplus in the face of a new geopolitical calculus. Ramping up new supplies—in the US and elsewhere—would take time, especially considering the ongoing reluctance of investors to finance new investment and the massive downsizing of the service and equipment sectors during the COVID oil-price crash. Increases in investment in US shale and elsewhere around the globe could eventually come into play over time as investment responds to higher prices, which would also accelerate demand-side adjustments, but we are talking months, maybe years, not weeks to replace any large decrease in Russian oil sales.
Longer term, the damage could extend to the Russian sector itself, possibly even stranding investment into Russian oilfields and transportation infrastructure.
This paper examines the potential for disruptions and a possible direction of change in Russia’s participation in the global oil market, and in the market itself. For a companion discussion of the natural gas dimensions of this issue by the Center for Energy Studies, please see “Strategic Response Options If Russia Cuts Gas Supplies to Europe” (February 2022).
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