statistics

Worldwide oil demand is likely to be about 100 million daily barrels in 2022.

The biggest users of oil are:

–the US, 20 million daily barrels;

–Europe, 15 million barrels;

–China, 14 million;

–India, 5 million.

The biggest producers:

–US, 12 million daily barrels

–Russia, 11 million

–Saudi Arabia, 10 million

–all of OPEC, 28 million

–Europe, 3 million.

Notes on usage:

Europe’s population is 2.2x the size of the US, but the US uses a third more oil, meaning we have 3x the European usage per capita.

Russia exports about 7 million barrels of oil daily. Just under 2 million goes to Europe, its biggest customer, less than 500,000 (pre-embargo) to the US.

The US has asked Saudi Arabia and the UAE to increase their production to offset the barrels no longer being bought from Russia. Both have refused, which makes sense from their domestic economic perspective.

what I’m thinking, in no particular order:

Demand for oil is relatively inflexible. Small changes in supply, even changes as small as 1%-2%, are enough to create dramatic swings up or down in price.

As I see it, what is going on in the oil market today is panicky anticipation of future supply shortfalls, not a reaction to shortages that are occurring now.

Why does the US use so much more oil than the rest of the world? It comes down to politics. The big oil companies incorporated in the US have powerful political influence and have enormous long-term investment in oil reserves, whose output they hope to sell years and years from now. They are also far behind European rivals in reshaping themselves into energy companies–meaning in developing renewables. Detroit automakers are technological laggards, as well–in their case in development of fuel-efficient gasoline engines. As very large employers and with workers who have generally been Democratic-voting union members, they have been protected by Washington from competition from superior offerings built by foreign auto majors for almost a half-century, long before the ecological damage being done by engine emissions was well understood. The most recent example of this protection came less than two years ago, when the Trump administration advocated rolling back minimum mileage requirements for cars, a short-term benefit for both the oil companies and the automakers but one that would have left the US even farther behind the rest of the world.

If Russia sold no oil outside its borders, the world would need to make up 7 million barrels, either through production elsewhere or conservation. Because oil demand is relatively inflexible, it’s hard to tell what a 7% shortfall in supply would do to price, other than it would rocket it higher. The price has already doubled from the early December lows to a high of $120 just a day or two ago on speculation about what might occur. And this is coming at what is seasonally the weakest for demand. This part of the picture doesn’t look good.

What has happened in past boycotts elsewhere, though, is that the oil majors, who buy from a lot of producing countries, simply swap the boycotted oil for some other variety and send unboycotted oil to the boycotting country. Or the boycotted oil is processed elsewhere and arrives in the boycotting country as products rather than crude. Or the oil is “accidentally” mislabeled and sold as unboycotted output. So whatever the final tally of quantities boycotted will turn out to be, it will likely considerably overstate the actual loss of supply of oil to end users. And we already know that large users of Russian crude like the EU aren’t going along with the US boycott, preferring in the EU case to use less Russian natural gas. If I had to make up a number, I’d guess that Russian oil exports fall by 2 million barrels a day, which would be bad but manageable.

If Russia could sell no oil/refined products abroad, it would have to store output somewhere and/or slow down the flow of crude to the surface. The latter risks doing long-term damage to the underground fields themselves. Given that foreign oilfield services companies aren’t likely do further business with Russia, such damage may be difficult to reverse. My guess is that this would be the most devastating consequence for Russia of the US boycott.

It appears the US + Canada can almost immediately make up for the boycotted Russian oil from North American sources. Just as OPEC–ex Venezuela, apparently–is unwilling to boost production to offset the boycott’s effect on consuming nations, many consuming nations are reluctant to participate in the oil boycott. The EU, for example, prefers to reduce its natural gas purchases instead. This suggests that the supply shortfall may be far less–at least initially–than the financial markets now suspect.

Will fracking in the US come to the rescue? From an oil major perspective, maybe. However, according to the Economist, small- and mid-sized frackers in the US lost their financial backers a mind-boggling $300 billion during their latest drilling frenzy (shades of 1982, when the same kind of crazy lending to overleveraged wildcatters also happened–this time junk bond funds). So they’re having a hard time raising the money they need to resume drilling.

Why no help from OPEC? To my mind, the simplest explanation has nothing to do with Russia. It’s that the Saudis need $80 a barrel oil to balance their government books. They’re swimming in money today. Why mess with a good thing?

The greatest fear of the domestic oil industry is (correctly) that the oil price reaches a level–let’s pluck $150 a barrel out of the air–that leads to a wholesale, strongly positive reevaluation of renewables. The switch away from oil starts in earnest. EVs become a 2025 thing, not 2035. The US starts to conserve in earnest. Suddenly, there’s a glut of oil and much, much lower prices.

Some commentators are saying that the current situation will turn into a replay of the high-inflation, low-growth era of the US in the 1970s because of the oil price spike. Maybe this will turn out to be true, but I don’t understand how.

During the 1970s, the oil price went up by more than 10x. Rising inflation was cemented into the US economy by wage contracts that called for inflation-beating yearly increases. Washington encouraged profligate use of oil by keeping domestic price below world market levels. It compelled the continuing purchase of gas-guzzlers by severely limiting the import of fuel-efficient alternatives. Presidents before Gerald Ford tended to arm-twist the Fed into lowering rates in election years to make their reelection easier, adding to the inflation problem (The Volcker era ended that. Trump tried in vain to revive the ’70s rate-manipulation practice). My point is the 1970s oil shock was much greater than today’s, there was a lot more wrong with the economy back then and the Fed has learned a lot since then.