As tensions rise between Russian and Ukraine, one of the issues being discussed a lot in the West is what a military conflict may do to oil prices.
Russia is one of the world’s largest oil producers. According to the 2021 BP Statistical Review of World Energy, in 2020 Russia produced 10.1 million barrels per day (BPD) of crude oil and natural gas condensate. That was good for second place behind the U.S. at 11.3 million BPD. Saudi Arabia was third at 9.3 million BPD.
However, the U.S. also consumes far more oil (17.2 million BPD) than Russia (3.2 million BPD) or Saudi Arabia (3.5 million BPD). The net result is that the U.S. is a net importer of crude oil, while Russia and Saudi Arabia are major crude oil exporters.
This also means that the U.S. economy is more vulnerable to oil price shocks, while higher oil prices are a net benefit to Russia and Saudi Arabia. Various talking heads have suggested that there will be a $5-$20 premium on oil prices if Russia invades Ukraine.
Although Ukraine produces some oil and natural gas, the primary concerns of a Russian invasion are 1). Ukraine is an important transit location for oil and gas; and 2). Russian sanctions would be put in place, potentially reducing the available oil supply in a tight market. If Russia could still sell all the oil it could produce to countries that refuse to abide by the sanctions, it might do well financially with an oil price spike.
But that leads to the question of how sanctions on Russia might impact the U.S. market. As of late 2021, the U.S. was importing 8.5 million BPD of crude oil from all countries. Canada was our top supplier, sending the U.S. 4.5 million BPD. (Having secure oil supplies from close allies highlights the importance of the Keystone XL Pipeline expansion). Mexico was second, at 700,000 BPD, and then Russia at 595,000 BPD. Saudi Arabia was our 4th largest supplier at 555,000 BPD.
Thus, Russia supplied 7% of U.S. crude oil imports in late 2021 – a significant number. Replacing that oil will put additional upward pressure on global oil prices, virtually assuring that oil will exceed $100/bbl if the situation further escalates.
Update: As I was finishing off this article, the situation escalated. Vladimir Putin has ordered Russian troops into the separatist regions of Ukraine. The oil markets are about to get very interesting.
