In this month’s special Mineral Rights News Episode for March 2022, we discuss the impact of Russia’s invasion of Ukraine on crude oil and natural gas prices and things we should be doing here in the U.S. to mitigate the effects.
As always, Justin Williams joins me to provide the individual mineral owner perspective and we discuss our respective takes on each story to help you keep tabs on the latest happenings in the world of minerals and royalties.
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Special Report on Oil and Gas Prices
Here’s what’s happening as of February 25th, 2022 as far as the oil markets are concerned as a result of the Russian invasion of Ukraine:
- Oil prices hit new highs since 2014 on Thursday, February 24th after Russia began their invasion of Ukraine. West Texas Intermediate Crude Oil topped $100 on the day before settling lower at $92.81 a barrel.
- As of February 25th, the Biden Administration has not sanctioned Russian energy exports.
- The U.S. energy envoy indicated that the US has been successful in increasing LNG exports to Europe.
- An emergency meeting of the governing board of IEA was scheduled to coordinate strategic reserve releases into the market.
- The European Union is exploring sanctions on Russian energy exports.
- Even if the U.S. and E.U. don’t sanction Russian energy exports, buyers of Russian crude oil have been unable to open letters of credit from Western banks to cover purchases due to uncertainty surrounding possible sanctions as a result of the Russian invasion.
- Even if the US and NATO allies decide to block Russian access to the SWIFT system that gives Russia access to the global financial system, or if sanctions are imposed on Russian oil and gas exports, the recent agreement between Russia and China to purchase coal and oil could negate much of the impact that Russia would feel from this. Russia is currently the 2nd largest exporter of oil to China
- Russia exported over $110.1 billion in crude oil in 2021. According to BP’s 2021 Statistical Review of World Energy, in 2020, russia produced 10.1 million bpd of crude oil and natural gas condensate which was 2nd behind the U.S. at 11.3 million BPD. That said, the U.S. consumes more oil at 17.2 million BPD vs. Russia’s 3.2 million BPD which makes the U.S. a net importer of crude oil and Russia a net exporter. This means that higher oil prices hurt the U.S. and help major exporting countries like Russia and Saudi Arabia. Most of Russia’s
Global Supply and Demand
- We are still in a tight oil market meaning demand is higher than supply.
- Not much room to supply more oil although estimates place spare capacity in the middle east at around 2.5-3 million barrels per day (primarily in Saudi Arabia and UAE).
- OPEC has indicated that they aren’t ready to increase production yet (higher prices help them, not hurt them).
- Western energy policy hasn’t changed from the focus on renewables and no talk of increasing domestic production has been entertained here in the United States by the Biden Administration.
- Gasoline prices are rising and “unfortunately, secretaries of Energy and the Interior Department Jennifer Granholm and Deb Haaland have not made any serious proposals that could result in lower crude prices or higher domestic production either. Instead, Energy Secretary Granholm laughed when asked about the Biden Administration’s plan to increase oil production in the U.S.”
What the Biden Administration Could do About Rising Energy Prices
Biden indicated that they would work with G7 countries to release oil from strategic petroleum reserves to help with oil prices. This likely won’t have a material impact on oil prices as evidenced by Biden’s announcement in November to release 50 million barrels per day. At current global supply deficit of around 1.5 to 4 million barrels per day this would only last a couple of weeks at most and the market would likely not price that much of an impact into the price of crude oil due to the added uncertainty around Russian crude supply disruptions.
Steps We Should Take to Reduce Oil and Prices in the U.S.
- Approve the Keystone XL Pipeline. President Biden cancelled the Keystone XL Pipeline project on his first day in office. We would now be in a situation where the project would be nearing completion. By restarting Keystone XL, they would be able to deliver 800,000 barrels per day of Canadian crude to refineries on the gulf coast. This would help offset some of the nearly 6 million barrels of crude that the US imported per day in 2020.
- President Biden should reopen Federal lands to drilling for oil and gas. Instead they recently stopped issuing drilling permits. He could sign an Exectuive Order to this effect to streamline permitting process and ensure access to capital for domestic oil and gas producers.
- The U.S. should continue to work with our European allies to replace their supply of Russian energy with U.S. energy such as through LNG and crude oil exports.
Impact of Higher Oil Prices on Rising Inflation
As we discussed in MRP 138: How High Oil Prices and Inflation Will Affect Royalty Owners, higher crude oil and natural gas prices are contributing to higher inflation. Absent of drastic changes, higher oil prices are likely to exacerbate already high inflation while at the same time the Fed is likely to be less aggressive at raising rates due to instability in the stock markets due to the Ukrainian situation.
Resources Mentioned in this Episode:
- Gasoline Prices Are On The Rise And Biden’s Hands Are Tied | OilPrice.com
- What drives crude oil prices: Supply OPEC
- Russia-Ukraine: OPEC+ agrees output hike despite oil price rally
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