Oil Prices Flirt with Historical Highs in Response to the War on Ukraine

In response to Russia’s invasion of Ukraine on February 24th, 2022, the U.S., along with its allies, imposed a fleet of crippling economic sanctions on Russia to deter Russia from continued aggression.[1] Meanwhile, private companies worldwide have taken it upon themselves to suspend services in Russia to increase the financial pressure cooker.[2] To increase the pressure on Vladimir Putin in hopes of spurring de-escalation, the United States banned Russian oil imports on March 8th, 2022.[3] Speculation leading up to the Russian oil ban sent West Texas Intermediate crude futures, the U.S. oil benchmark, skyrocketing to the 13-year-high of $130.50 per barrel.[4]

In 2020, Russia was the world’s third-largest petroleum producer behind the United States and Saudi Arabia.[5]According to the U.S. Energy Information Agency,  8% of all U.S. petroleum imports in 2021 came from Russia.[6] Most petroleum imports from Russia are unfinished oil and fuel oil used to supplement crude oil in the refining process.[7]While the U.S. has minimal dependence on Russian petroleum products, the EU is heavily reliant on Russian energy supplies, receiving about 45% of its natural gas imports, about 40% of its total natural gas consumption, directly from Russia.[8] While the EU initially considered banning Russian petroleum products in alignment with the U.S., EU leaders ultimately declined to enact an impracticable embargo on Russian fossil fuels due to their heavy reliance on Russian energy imports.[9]

Compared to the thirteen-year-high of $130.50 per barrel, the highest oil price in American history peaked at $147 per barrel in 2008.[10] On March 6th, 2022, while skyrocketing crude oil prices driven by the conflict in Ukraine flirt with the 2008 U.S. historical high, prices at the pump rose to an average of  $4.009 per gallon.[11] On March 29th, 2022, the U.S. average price per gallon hovered around $4.244, up 6% from two weeks prior.[12] In 2008 when crude prices maxed out at $147 per barrel, the highest average price realized at the pump was only a mere $4.09 per gallon.[13] Daily drivers and experts alike are now asking how much further can we expect prices to rise as the conflict in Ukraine continues?

As the U.S. moves away from Russian petroleum imports, the global energy supply to the global energy demand swing out of balance. With the U.S. lacking the imports needed to make the energy consumption pie whole stateside, what will make up the gap between supply and demand? Will the U.S. strive to increase domestic energy output or search for other sources to fill the gap?

U.S. oil production has been flat since the Fall of 2021, with production levels around 11.6 million barrels per day.[14] As of March 25th, 2022, the U.S. drilling rig count rose to 670 active rigs, up from 417 a year ago.[15] While increasing domestic oil production to combat rising prices is an option, permitting and drilling will likely take six to nine months.[16] In addition to the speculative ramp-up of domestic supply, the U.S. is also considering sourcing petroleum imports from Venezuela and Saudi Arabia.[17] On March 4th, 2022, four days before President Biden’s announcement to ban Russian oil imports, U.S. officials flew to Venezuela to discuss the possibility of easing sanctions on Venezuelan oil exports.[18] Diplomatic relations with Venezuela were severed in 2019 after the U.S. accused President Nicolas Maduro of stealing the election, the American embassy in Venezuela was closed, and the U.S. imposed severe sanctions, including sanctions restricting Venezuela’s petroleum exports.[19] When it comes to Saudi Arabia, despite President Biden’s 2019 campaign promise to “make them [Saudi Arabia] pay the price, and make them in fact, the pariah that they are,” when referring to Saudi Arabia regarding human rights abuses, Biden is reportedly considering a spring visit to Saudi Arabia to discuss increasing oil production.[20] While neither Saudi Arabia nor Venezuela has yet to strike a deal with the U.S. to supplement petroleum imports in the wake of banning Russian energy imports, both options are still on the table.

With no end in sight to the war in Ukraine, Russian oil and petroleum products serve as a means of direct funding against the Ukrainian people. Although the U.S. has banned Russian petroleum imports, the EU and plenty of countries continue to import petroleum products from Russia, further financing Vladimir Putin’s ruthless war. As attacks continue on Ukraine and tensions continue to rise between Russia and NATO, the world as a whole must now decide if it’s time to align with the U.S. to ban Russian petroleum imports to a greater degree, and if so, for how long?

[1] Timeline: The events leading up to Russia’s invasion of Ukraine, Reuters (Mar. 1, 2022) https://www.reuters.com/world/europe/events-leading-up-russias-invasion-ukraine-2022-02-28/; Edward Wong & Michael Crowley, With Sanctions, U.S. and Europe Aim to Punish Putin and Fuel Russian Unrest, N.Y. Times (Mar. 4, 2022) https://www.nytimes.com/2022/03/04/us/politics/russia-sanctions-ukraine.html.

[2] Irina Ivanova & Kate Gibson, These are the companies that have pulled out of Russia since its invasion of Ukraine, CBS News (Mar. 11, 2022) https://www.cbsnews.com/news/russia-corporations-that-have-pulled-out/.

[3] Trevor Hunnicutt & Steve Holland, Biden bans Russian oil imports to U.S., warns U.S. gasoline prices will rise further, Reuters (Mar. 8, 2022) https://www.reuters.com/business/biden-announce-ban-russian-oil-tuesday-sources-2022-03-08/.

[4] Tanaya Macheel & Pippa Stevens, U.S. crude oil spikes to 13-year-high of $130 overnight, then gives up most of the gain, CNBC (Mar. 6, 2022) https://www.cnbc.com/2022/03/06/us-crude-oil-jumps-to-125-a-barrel-a-13-year-high-on-possible-western-ban-of-russian-oil.html.

[5] Russia: Analysis – Energy Sector Highlights, energy information agency, https://www.eia.gov/international/overview/country/RUS (last updated Dec. 13, 2021).

[6] The United States imports more petroleum products than crude oil from Russia, energy information agency (Mar. 22, 2022) https://www.eia.gov/todayinenergy/detail.php?id=51738.

[7] Id.

[8] How Europe can cut natural gas imports from Russia significantly within a year, Int’l Energy Agency (Mar. 3, 2022) https://www.iea.org/news/how-europe-can-cut-natural-gas-imports-from-russia-significantly-within-a-year.

[9] John Kemp, Column: EU steps back from impractical Russia oil embargo, Reuters (Mar. 27, 2022) Column: EU steps back from impractical Russia oil embargo | Reuters.

[10] Avi Salzman, How Oil Could Hit $150, It’s Just Not About Russia., Barron’s (Feb. 14, 2022) https://www.barrons.com/articles/how-oil-could-hit-150-its-not-just-about-russia-51644856987.

[11] Gas Prices, AAA, https://gasprices.aaa.com/state-gas-price-averages/ (last visited Mar. 6, 2022).

[12] Gas Prices, AAA, https://gasprices.aaa.com/state-gas-price-averages/ (last visited Mar. 29, 2022).

[13] Avi Salzman, How Oil Could Hit $150, It’s Just Not About Russia., Barron’s (Feb. 14, 2022) https://www.barrons.com/articles/how-oil-could-hit-150-its-not-just-about-russia-51644856987.

[14] Ryan Dezember & Kenny Jimenez, Oil Tops $130 a Barrel as Russian Attacks Escalate, The Wall St. J. (Mar. 6, 2022) https://www.wsj.com/articles/oil-buyers-paying-record-premiums-for-prompt-deliveries-11646518865.

[15] North American Rig Count, Baker Hughes, https://rigcount.bakerhughes.com/na-rig-count (last visted Mar. 25, 2022).

[16] Ryan Dezember & Kenny Jimenez, Oil Tops $130 a Barrel as Russian Attacks Escalate, The Wall St. J. (Mar. 6, 2022) https://www.wsj.com/articles/oil-buyers-paying-record-premiums-for-prompt-deliveries-11646518865.

[17] Debbie Elliot, The U.S. renews talks with oil-rich Venezuela after banning Russia oil imports, Nat’l Public Radio (Mar. 13, 2022) https://www.npr.org/2022/03/13/1086329984/the-u-s-renews-talks-with-oil-rich-venezuela-after-banning-russian-oil-imports.

[18] John Hudson & Samantha Schmidt, U.S. officials make rare trip to Venezuela, discuss resuming oil imports to help replace Russian fuel, Wash. Post (Mar. 6, 2022) https://www.washingtonpost.com/world/2022/03/06/venezuela-american-officials-visit/; Tristan Bove, Biden is courting Saudi Arabia and Venezuela as he bans Russian energy imports. Here’s what he might be up to., Fortune (Mar. 9, 2022) https://fortune.com/2022/03/09/biden-saudi-arabia-venezuela-oil-energy-prices-russia-ukraine/.

[19] Tristan Bove, Biden is courting Saudi Arabia and Venezuela as he bans Russian energy imports. Here’s what he might be up to., Fortune (Mar. 9, 2022) https://fortune.com/2022/03/09/biden-saudi-arabia-venezuela-oil-energy-prices-russia-ukraine/.

[20] Tristan Bove, Biden is courting Saudi Arabia and Venezuela as he bans Russian energy imports. Here’s what he might be up to., Fortune (Mar. 9, 2022) https://fortune.com/2022/03/09/biden-saudi-arabia-venezuela-oil-energy-prices-russia-ukraine/.