Analysis: Oil Rises to Serious Inflation Level, But US Boycott Doesn’t Cause Collapse

US President Joe Biden confirmed on Tuesday afternoon (8) that he has barred the purchase of Russian oil. The UK has said it will reduce its imports from Russia to zero by the end of the year.

For various reasons, the decision ends up putting the price of a barrel at a new level, close to US$ 125 (R$ 636), for now, up 60% this year. It is the price of rising inflation all over the world, but not collapsing. The barrel became less expensive after Biden’s speech. Stocks went up.

The US embargo will not be accompanied by the European Union (“we took a step that other countries cannot take”, said Biden), which imports about 25% of the oil it consumes from Russia. A European embargo could push prices beyond US$200 (R$1,017). There would be no alternative production in OPEC anytime soon, even if US sanctions against Iran and Venezuela were lifted tomorrow, a political miracle (more on this issue later).

The American decision could take little oil from the market, less than 1% of total world exports. But part of these barrels embargoed by Biden can be sold in other markets, to Russia’s allies, such as China, which would thus stop buying from other producers (although this decision is not as simple as changing bakeries). American production may increase, for reasons other than the embargo. Europeans and Americans negotiate production increases with other countries.

Furthermore, since the beginning of the Ukraine war, the United States and allies have said that they will put on the market about 60 million barrels of oil from their strategic reserves (4% of the total stocks of the member countries of the International Energy Agency ). That is, they released the equivalent of 90 days of Russian sales to the US.

Still, the Biden administration’s decision puts the price of a barrel at a new level, between US$ 120 to US$ 130, industry analysts said on Tuesday (they may change their minds tomorrow, however). It should be remembered that part of the Russian production was already being rejected even without official sanctions. Companies do not want to do business with Russia or cannot, due to financing, insurance and transportation difficulties.

Last year, the United States imported about 671,800 barrels of oil and oil products from Russia, on a daily average for the year, according to the US government’s Department of Energy Information (EIA).

It seems little, given the size of the international market. It represents only 8% of American purchases abroad. American companies imported from Russia due to geographic, price, logistics and technical characteristics of refineries. Last year, about 51% of total US imports came from Canada, 11.3% from OPEC countries and 8.4% from Mexico, according to EIA tables.

But even 672,000 barrels a day can make a big difference to prices in a very tight world market, where there is no oil left on the market. If more Russian oil left the trade, the crisis would be even more serious.

There are estimates that the lack of 1 million barrels per day on the market could raise the price of Brent, a world reference, by US$ 15 (R$ 76). Eberaldo de Almeida Neto, president of the IBP (Brazilian Institute of Oil and Gas), says he is aware of studies in which the estimated price jump would be US$ 20 for every million barrels per day that “disappeared” from the market.

The Russian government has been saying in recent days that a total embargo on the country’s oil exports would push the price of a barrel to US$ 300 (R$ 1,526). By the accounts of financial and energy analysts in the “West”, at least US$ 250 (R$ 1,272) would be a reasonable bill.

According to a report by the International Energy Agency (IEA, an arm of the OECD), Russia exported around 7.8 million barrels of oil and oil products per day in December. To a reasonable approximation, Russia sells more than 10% of the world’s crude oil and oil products. Of Russian exports, 60% go to Europe, 20% to China and 8% to the US.

World consumption was around 99.03 million barrels a day in January 2022, for a production of 99 million. World exports were around 75 million barrels a day. It is an approximation made with data from OPEC and economic consultants. There is no accurate public and recent data, some are treated as secret and part of the trade is clandestine (as in the case of countries subject to sanctions).

The European Union imports around 96.6% of the oil and oil products it consumes (average for the most recent years, 2018 and 2019, before the epidemic, and for the first half of 2021). About 25% of its imports come from Russia. That is, almost 24% of what it consumes comes from Russia. In the case of natural gas, dependence on imports is 86%.

Of the gas that matters, about 44% to 47% is Russian. That is, from 37% to 40% of what they consumed in recent years. On Tuesday, the European Union announced that it intends to reduce its dependence on Russian gas by two-thirds by early next year.

Finding an alternative supplier of oil and derivatives is difficult. To facilitate the discussion, it is accepted that the sanctions of the “West”, most of the United States, against Iran and Venezuela were lifted. Even the political hypothesis would not solve the supply problem. In theory, according to the export tables, it would be possible to take around 2.9 million barrels per day from these countries to the world market. But this is mere historical fiction based on statistics.

Iran would need at least eight months or until the end of the year to increase its production by 1.2 million barrels a day, estimates Eberaldo Almeida Neto, the president of the IBP, 34 years at Petrobras, where he was director until May of 2020. The IBP is an association that represents the interests of oil companies installed in Brazil.

The country would have to retread its productive park and invest. What’s more, it couldn’t just sell the extra oil available. OPEC, the cartel of producing countries, defines quotas for each member country and rates of increase in supply. Currently, it has increased production by 400,000 barrels a day, every month.

Iran exported around 2.8 million barrels of oil and oil products per day in 2010 and 2011 (around 5% to 6% of world market sales). With US government sanctions, especially those in 2011 (under Barack Obama), Iranian exports dwindled and fell to 935,000 barrels a day in 2019 and 684,000 in 2020, at least in official statistics (abnormal year, low consumption , because of the epidemic). The data are from OPEC. There are no latest public figures.

It is even more difficult to estimate when it would be possible to recover Venezuelan production: reorganizing the administration, studying production possibilities, importing equipment suitable for local oil, starting production. The American governments of Barack Obama (2009-2016) and, in particular, of Donald Trump (2017-2020), imposed sanctions against the government of Nicolás Maduro. But Venezuelan production had already declined somewhat before that. With US sanctions and other side effects of those measures, production and sales plummeted.

Almeida Neto, from the IBP, says that PDVSA, the state oil company Venezuela, had very high-level cadres, replaced by the military and trade unionists. Lack of investment and mismanagement scrapped production and refining infrastructure; part has become obsolete. To start solving the problem, at least six months.

The most recent peak of Venezuela’s exports was in 2014-2015, sales of 2.29 million barrels a day, about 4.8% of the world market. In 2019, it was 945,000 barrels a day.

Almeida Neto believes that the rise in prices may make American producers of “shale” fields (shale or shale, unconventional exploration) return to the market. In international studies of the sector, production is viable from US$ 70 a barrel.

However, price drops, due to OPEC or the epidemic, and environmental restrictions on producing, transporting and consuming oil, had driven producers out of the market. It would not be worth investing with diminishing prospects, is the assessment that was read in the American financial media. With the “shale”, the US had greatly increased its production, becoming the largest oil producer in 2018.