Before its forces invaded Ukraine, Russia provided one out of every 10 barrels of oil the world consumed. But as the United States and other customers shun Russian crude, the global oil market faces its greatest upheaval since the Middle East tumult of the 1970s.
An energy price shock will probably last as long as the confrontation goes on, since there are few alternatives to quickly replace Russia’s exports of roughly five million barrels a day.
Oil prices were already rising fast as the world economy emerged from Covid-19 shutdowns and producers stretched to meet growing demand. International oil companies had cut back investment over the last two years.
Now traders are bidding up crude prices to levels not seen in years, expecting that Russia — one of the top three oil producers, along with the United States and Saudi Arabia — will be sidelined. With the announcement of the American embargo on Tuesday, prices will probably climb higher, energy analysts say.
“We are catastrophically tightening,” said Robert McNally, a former energy adviser to President George W. Bush. “What we need right now is countries producing more oil.”
That will not be easy. Only Saudi Arabia, the United Arab Emirates and Kuwait have spare capacity, together a little more than 2.5 million barrels a day. Venezuela and Iran could contribute about 1.5 million barrels a day to the market, but that would require lifting American sanctions against those countries. And the United States could increase output by more than a million barrels a day — but doing so would take a year to achieve, and require oil companies to harness more manpower and equipment.
There have been few comparable disruptions of oil supplies. The 1978 Iranian revolution took an estimated 5.6 million barrels a day off the market, while the 1973-74 embargo by Arab members of OPEC and the 1990-91 Persian Gulf war removed 4.3 million barrels.
A glimmer of hope came out of Venezuela this week as President Nicolás Maduro said he would talk with his domestic opposition and then released at least two Americans imprisoned in his country. It was apparently a response to a weekend visit by Biden administration officials to discuss the lifting of sanctions that Washington imposed in 2019 over election fraud, human rights violations and his close relations to Iran, Russia and China.
But Venezuela’s oil industry, one of the world’s strongest 30 years ago, is a shambles. Its pump jacks and refineries are rusting, and it can barely supply its own people with fuel. Its national oil company will need billions of dollars of investment to return to the market as a major exporter.
Negotiations with Iran to revive the 2015 nuclear deal and open the taps of Iranian exports appeared imminent only a few days ago. But a demand by Russia for a written guarantee from the United States that Western sanctions on Russia will not impede Russia’s trade with Iran has cast doubt over the talks.
Should the stalemate be broken, Iran has several hundred thousand barrels of oil stored on tankers that could be shipped immediately. After that, it could add a million barrels a day of production.
Potentially more important are Saudi Arabia, the United Arab Emirates and Kuwait, traditional allies of the United States and members of the Organization of the Petroleum Exporting Countries.