Bum-rush towards ban
An emotional appeal from Ukrainian President Volodymyr Zelenskyy to ban Russian oil — delivered to more than 300 members of Congress during a Saturday Zoom meeting — strengthened bipartisan resolve. No. 2 Senate Democrat Sen. Dick Durbin (D-Ill.) quickly announced himself as a co-sponsor of a bill introduced last week by Energy Chair Joe Manchin (D-W.Va.) and Sen. Lisa Murkowski (R-Alaska).
Speaker Nancy Pelosi doubled down on her support for a ban, tweeting out a video of her telling the California Democratic Party’s convention that “we must stop buying and relying on Russian oil and move to diversify our energy sources.” And she told her Democratic caucus Sunday night that the House will explore legislation to ban the import of Russian oil as part of a larger package to isolate Moscow.
The White House, which risks being out of step with Democrats, is “now in very active discussions with our European partners about banning the import of Russian oil to our countries,” Secretary of State Antony Blinken said Sunday on CNN’s “State of the Union.” And Axios reported on Sunday evening that Biden’s advisers are discussing a possible visit to Saudi Arabia this spring to help repair relations and convince the Kingdom to pump more oil.
And there’s this Reuters/Ipsos poll showing four out of five Americans back a ban.
Details matter: Even if President Joe Biden feels compelled to move against Russian oil, analysts say the details of implementation will dictate whether the administration can fulfill its pledge of ensuring sufficient supply of oil on world markets to stave off a further jump in U.S. gasoline prices, which could reach an average of $4.10/gallon this week, according to GasBuddy.
A U.S. prohibition alone would affect a small slice of the global energy market, as refiners already started shifting to other sources amid rising tensions in Europe.
“For the U.S, declaring an embargo on Russian oil is an easy step to take,” Antoine Halff, an adjunct senior research scholar at Columbia University’s Center on Global Energy Policy told ME. “U.S. importers right now are staying away from Russian barrels. It’s happening de-facto anyway.”
Most of what Russia sends to the U.S. is not crude, but rather unfinished oils or heavy oil that refiners use for blending purposes.
Refiners can find substitutes for heavy oil from places like Mexico, Ecuador, and Colombia, according to Ben Cahill, senior fellow at the energy program of the Center for Strategic and International Studies. The White House might have another ace up its sleeve, as reports surfaced this weekend that U.S. officials met with Venezuelan President Nicolás Maduro’s regime in a bid to unlock that country’s heavy, sludgy oil, which has been blocked from Gulf Coast refiners since 2019 by sanctions. The loss of Venezuelan oil is what prompted U.S. refiners to seek alternative products from Russia to begin with.
“It might be a slight inconvenience for refiners to find alternatives to Russian oil, but not really,” Amy Myers Jaffe, a professor at the Fletcher School at Tufts University, told ME. “It’s just not an important feedstock here.”
It would be an entirely different story if Europe too were to swear off imports of Russian crude, a possibility teased by Blinken if you take his comments to CNN literally. Europe relies much more heavily on Russia’s supply, purchasing more than 2.5 million barrels per day, or about half the country’s exports.
In that scenario, “a near-balance” in the oil market is “theoretically possible” if China expands its purchases of Russian oil as a buyer of last resort, freeing up Mideast suppliers to send more to Europe, said Kevin Book, managing director of consulting firm ClearView Energy. But that won’t happen overnight, and it’s hard to see how prices won’t spiral from such a dramatic move, which could prompt Russian President Vladmir Putin to retaliate by shutting off gas exports to Europe.
The more likely strategy, analysts say, is the Biden administration will look to carefully calibrate U.S. cut-offs of Russian energy in consultation with European allies.
“The US and allies will attempt to phase in and condition any sanctions on Russia’s oil exports so as to not create further upward pressure on global prices,” Bob McNally, president of Rapidan Energy, a research firm, told ME. “Doing so will be very tricky.”
FORTUITOUS TIMING FOR CERA: The heads of several global energy companies are meeting at S&P Global’s CERAWeek energy conference in Houston at a time when it seems the industry has reached a historical inflection point.
For the past several years, the world had been coalescing around three main power players in oil and gas: the U.S., Russia and Saudi Arabia. Now with Russia’s invasion of Ukraine, that country has become a geopolitical pariah. Exxon, BP, Shell and others are leaving behind the projects they operated there for years and traders are avoiding Russian oil.
The industry itself seems to be searching for its next steps. Even with Russian crude petroleum non gratis in the market and the domestic price benchmark surging, companies actually reduced the number of new oil drilling rigs by three last week (while adding three to gas-directed drilling to keep the overall count flat), according to data from oilfield services company Baker Hughes.
“If you’re not satisfied with the current level of U.S. oil and gas production, blame investors, not the Biden administration,” Mark Brownstein, senior vice president of energy at Environmental Defense Fund wrote in a blog post. “Let’s not pretend that the pain Americans are currently feeling at the pump…is due to anything other than a senseless and illegal war and market economics at work.”
Biden administration officials from the State Department, Energy Department and FERC are planning to meet with industry executives in Houston this week, sources told ME. White House Climate Adviser John Kerry and Energy Secretary Jennifer Granholm, both of whom are scheduled to appear at the conference, are probably updating their speeches to address the current energy crisis.
No one knows how the war will ultimately change the industry.
But there’s a certainty among executives and analysts that life for the energy industry is not going back to the way it was before Russian tanks crossed the border into Ukraine.
“This is not temporary,” ClearView’s Book said.“This is a secular change in global geopolitics. There’s a huge cognitive dissonance going on if you pretend the world will be the same as it was.”