Where does the US get its oil from – and what will happen to gas prices amid Russian invasion of Ukraine?

Sanctions, retaliations, and economic turmoil could send oil prices soaring across the world

Io Dodds
San Francisco
Monday 07 March 2022 15:59
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Biden says US is taking steps to blunt gas prices

For all the wind farms and solar panels we've built, the world – and especially the United States – still runs on oil and gas.

That is why the onset of a Russian invasion of Ukraine threatens not only a human rights catastrophe in Europe but economic turmoil for American consumers, as well as a giant headache for US president Joe Biden.

Russia is one of the world's biggest fossil fuel producers, yielding about 12 per cent of the global economy's oil and 17 per cent of its natural gas. Much of the latter is carried to Europe via pipelines that run through Ukraine, potentially freezing the whole continent's supply.

Russian president Vladimir Putin's decision to recognise the independence of breakaway territories in Ukraine this week drove the price of crude oil up to nearly $100 (£74) per barrel. Mr Putin has announced a military operation in Ukraine, and gunfire and explosions were heard in Kiev early Thursday, according to local and international media.

So how vulnerable is the US to an oil shock, and what would an invasion of Ukraine do to gas prices?

How much oil does the US import from Russia?

Not much, but not nothing. While America has struggled for decades to reduce its dependence on foreign oil, with some success, Russia's share is at a historic high.

The shale oil boom of the 2010s made the US a major oil exporter, surpassing the production levels of both Russia and Saudi Arabia in 201.

According to the US Energy Information Administration (EIA), America imported an average of 266 million barrels of crude oil per month in the six months ending last November (the latest month for which data has been published).

Just under half of that oil, or 132 million barrels, came from Canada, a US ally and member of the Five Eyes intelligence-sharing alliance (along with the UK), which dredges up vast quantities of hydrocarbons from the tar sands under Alberta.

About nine per cent of US imports came from Persian Gulf countries (Saudi Arabia alone accounts for almost six per cent of those imports), with Mexico providing another nine per cent and a long list of countries, from Brazil through Iraq to Norway, providing less than two per cent each.

However, eight per cent of imports still came from Russia – an average of 22 million barrels per month – and that share has been steadily rising.

In 1995, EIA data puts Russia's share of US oil imports at almost nothing, before steadily rising to an average of six per cent at the start of 2012. In 2019, though, it began to shoot up to its current levels.

Will gas prices continue to rise?

Almost certainly. Though US gas prices may suffer directly, the bigger problem will actually come from the many other countries who are far more dependent on Russian oil.

Oil supplies are already tight, in part because the pandemic slashed the world's demand for oil and wreaked havoc on the oil industry. Now demand is rising again, but the industry has not yet caught up.

Worse, the Organisation of Petroleum Exporting Countries (OPEC) – a cartel of major oil producers ranging from the Gulf states to Angola to Venezuela, which act together to influence the market – took radical action to keep prices high.

In the depths of the pandemic, OPEC struck an agreement with non-members including Russia to make the biggest production cut in its history. Yet it has been far slower to increase production as the world recovered from Covid.

Now the US has imposed sanctions on Russia, and now that Russia has launched an attack on Ukraine, it will certainly impose more penalties. Allies such as the European Union will follow suit, making it difficult for Russia to export oil to the rest of the world.

Mr Putin could also choose to cut off oil exports to various countries in retaliation for any attempt at punishing his actions in Ukraine.

Hence, an invasion of Ukraine would probably create a sharp drop in the amount of available oil worldwide – and hence, through the laws of supply and demand, higher oil prices.

How high will gas prices go?

It's hard to know. Last week, oil industry veteran John Driscoll suggested crude oil prices could surpass $120 or even $150 per barrel.

A recent forecast from JPMorgan Chase said that even in the "best-case scenario" for Ukraine, crude oil would not drop below $84 per barrel due to all the other factors in the mix.

Experts believe consumer gas prices in the US are likely to reach $4 a gallon, or $5 in higher-tax states such as California, by early spring.

Can anything stop it? Action by national governments to keep prices low could protect consumers from the worst impacts, and with midterm elections coming up in November, President Biden is clearly alarmed by the situation.

"I want to limit the pain that the American people are feeling at the pump," he said on Tuesday, pledging to use "every tool at our disposal" to "blunt" the effect on consumers.

According to reports, the White House is considering releasing oil from the US strategic petroleum reserve, a network of underground caverns along the Gulf of Mexico that holds massive stockpiles of crude oil. News of that option led to small price drops on global markets on Wednesday.

Beyond that, however, there may be little Mr Biden can do. Presidents have only limited control over oil prices compared to private companies and foreign governments. Some Democratic senators have proposed suspending America's federal gas tax for the rest of its year.

For its part, OPEC is unafraid to use oil prices as a political tool, and a Ukraine invasion – plus outreach from Mr Biden – could persuade them to increase production.

Oddly, Mr Biden's best hope of salvation might lie with Iran. The US is still negotiating to revive Barack Obama's 2015 nuclear deal, which was scrapped by Donald Trump in 2018. If that deal goes through, Iran would be able to export a lot more oil.

In other words, if American consumers are spared the worst of an oil crisis, they might just have Ayatollah Ali Khamenei to thank.

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