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The Impact of Russia on World Crude Oil Supply & Demand:

Everything you need to know about Russian Energy!

Russia is the world’s third largest crude oil producing country second only to the US. In addition to crude oil, Russia provides more than 40% of the Natural Gas used in Europe.  The country has a lot of geopolitical influence in the world, but what does that mean for the future of our global energy supply?  How will Russia’s geopolitical actions affect crude oil prices?  If crude and natural gas supplies from Russia are sanctioned, how will the supply and demand be balanced?

When Russia joined OPEC+ in 2016, the organization became one of the most prominent influences in the world.   OPEC already commands a large percentage of the World Supply of Crude Oil with over 28 MMBOPD, that represents close to 30% of the global demand.  Add in Russia’s 10-11 MMBOPD, and it becomes close to 40% of the world’s supply of crude oil.

Crude Oil is needed not only for transportation, but also for agriculture, manufacturing, plastics, and many more.  Roughly 64% of oil demand is used to support Transportation – but please recognize that includes every facet of transportation (airlines, shipping, trucking, and automobiles) and roughly 20% of oil demand is represented in industry, agriculture, buildings, commercial, and public services.

How would the world respond if Russia’s supplies are no longer available?

Russia's Oil Supply

As of early 2022, Russia produces roughly 10-11 MMBOPD and consumes roughly 3 MMBOPD of refined products leaving a large amount of oil that is exported out of the country.  The main port for Russian crude oil is Novorossiysk which feeds into the Black Sea – it is important to understand that the Black Sea needs to pass through Turkey to access the Mediterranean Sea.  Oil and natural gas are not just a commodity used for fuel, but it’s also used to produce goods like plastics and fertilizers.  If Russia cut off their supplies of oil and natural gas, they would have massive impacts on their economy as well as other countries that rely on Russian products.

Russia's Natural Gas Supply

Russia is one of the world’s largest suppliers of natural gas, providing a significant portion of the natural gas used in Europe.  In early 2022, Russia exported 40% of its natural gas to Europe through pipelines running through Ukraine. One consequence of this is that if Russia cut off these exports, Russia would also be cutting off Europe’s supply of energy which could lead to an international crisis between these countries.

The country has a lot of geopolitical influence and can even dictate prices in many European countries.  While Russia exports its natural gas to Europe, it also has plans to increase their production by building new pipelines and drilling.  This would give Russia more control over its own supply chain, which would decrease dependence on pipeline imports from Central Asia.  However, some Russian companies have been shown to be reluctant to expand into new markets, which could hamper future production opportunities.

What would happen if Russia's supplies are no longer available?

If Russia’s supplies are no longer available, the world would be left with a number of challenges.  If Russia’s crude oil is no longer available, the price of crude oil would skyrocket due to a lack of supply.   This would most certainly result in a drastic increase in gas prices and transport prices.  And, in March of 2022, we can see the impact of potential Russian sanctions that would limit the world’s supply of crude oil.

If Russia’s natural gas is no longer available, factories may start shutting down or slowing production due to the lack of power generation. This could also affect winter heating as natural gas is needed for this. The world would need to find an alternative solution for power generation and winter heating if Russia stopped supplying natural gas.

Russia has a lot of geopolitical influence over much of the world, so if they were to stop supplying their energy resources, it creates new geopolitical conflicts that might have otherwise not existed. For example, because Europe relies on Russian natural gas for 40% of its energy needs, it is vulnerable to political actions from other countries or groups like OPEC+. A disruption in supplies from Russia would create even more pressure on Europe and create new tensions between nations that had previously been at peace.

Conclusion

In 2020, Russia’s oil and gas exports account for approximately 50% of the country’s GDP.  Sanctions on energy would impact the country in a very severe manner (unless some creative ways to execute trade outside of the sanctions were to come into play).  Sanctions on energy is difficult though as Russia supplies 40% of Natural Gas to Europe (through Nord Stream 1 and pipelines that travel through Ukraine.

As a result, geopolitical actions have an enormous effect on global crude oil prices which is used as part of a strategy for various goals that Russia seeks.  If sanctions or other constraints limit Russian production from the global supply mix, the deficit would be over 6% of the global supply – and without storage or stocks to soften the impact, economies around the world would likely suffer.  As part of it’s ongoing initiatives, Russia is well aware of this influence and uses this information to further their goals and objectives.  While joining OPEC + was controversial at the time, it does concentrate most of the world’s energy resources in the hands of OPEC +.   Aligning OPEC with Russia puts the energy supply for the world in a very interesting (sometimes concerning) way.  

Ultimately, should Russia’s supplies be eliminated from the worldwide mix, there would be an adaptation that would incentivize other countries and producers of energy to come into the mix.  In the short run, there would be a shortfall of products (and more important Natural Gas) but in the long run, we might have a more stable energy supply portfolio.

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