MOHAMMAD BARKINDO, secretary-general of the Organisation of the Petroleum Exporting Countries (OPEC), reflected upon the dramatic geopolitical developments of the past few weeks as he addressed a ballroom in Houston this week. Thousands of oil executives have gathered in the world’s petroleum capital for CERAWeek, an energy conference organised annually by S&P Global, a financial-information provider. He observed that the OPEC cartel has seen seven painful boom-and-bust cycles in oil since its founding in 1960, and worried that the Russian crisis may lead to another such “catastrophe”.
His warning came on a monumental day in the history of energy. In retaliation for Vladimir Putin’s bloody and unprovoked attack on Ukraine, on March 8th America imposed a total ban on imports of Russian oil and Britain said it would phase one in over several months. President Joe Biden spoke of targeting the “main artery of Russia’s economy”. No EU country joined the embargo but on the same day the European Commission unveiled its new energy strategy, explicitly designed to slash the EU’s reliance on Russian gas, which accounts for some 40% of its total consumption of the fossil fuel, by two-thirds this year and entirely “well before 2030”. Mr Putin parried with a decree on March 8th threatening to cut off commodity exports, which given Russia’s outsized role in everything from wheat to nickel could up-end world markets. The price of Brent crude, the international benchmark, soared above $130 a barrel. “When this is over, however it ends, the world oil industry will be different,” sums up Daniel Yergin, an energy wiseman and vice-chairman of S&P Global.
One short-term consequence may be to rehabilitate big oil, blamed for helping fuel the climate crisis. The prospect of an oil shock has led even Mr Biden’s climate-friendly administration to embrace America’s unloved energy giants. Officials including John Kerry, the president’s climate envoy, were originally expected to dress oilmen down at the Houston jamboree about their lacklustre decarbonising efforts. Instead, they toned down the tut-tutting and quietly encouraged oil CEOs to crank out more crude to offset the loss of unsavoury Russian supply. Mr Barkindo gleefully invoked a recent tweet by Elon Musk, an electric-car billionaire, that “We need to increase oil and gas output immediately.” One oilman in the audience relished the chest-thumping “we told you so” speeches. John Hess, the eponymous boss of an oil firm, argued that “we need a strong oil-and-gas industry right here at home in the energy transition.”
Russia used to be seen as a trusted partner. Now, Mr Yergin says, it is seen “not just as unreliable but undesirable as well”. If Russian oil becomes untouchable, oil executives speculated nervously over coffee and cocktails, crude could hit $200 a barrel this year. They were nervous because, setting aside all the on-stage posturing, many oil bosses privately worry that the Russian crisis may sound their industry’s death knell. The EU’s new strategy is already doubling down on greener alternatives. A prolonged period of volatility and high prices that alienates consumers and unnerves investors may give American politicians, too, the nudge they need to accelerate the move away from fossil fuels.
Will oil prices keep surging? That depends on several factors, starting with the embargo. America imports only a trifling amount of petroleum products from Russia, a disruption which can easily be managed. Helen Currie, chief economist of ConocoPhillips, an American oil firm, thinks the American ban will not have much impact because American refiners were already finding ways to “optimise around” the loss of those imports. At the conference, Canadian energy firms claimed they could increase output to replace a third of the lost Russian imports “tomorrow”.
That might change if America rallies the world around a global embargo. However, such an outcome seems unlikely. The EU is reticent, at least in the short run. China and India, which hate American sanctions and who refuse to condemn Russia’s invasion, will not join. Kenneth Medlock of Rice University points to a recent gas deal between Russia and China to be settled in euros rather than dollars as a sign that the two can work around American sanctions. They may import more Russian Urals crude, not least because it trades at a discount relative to Brent, according to S&P Global, possibly as a result of “self-sanctioning” by some commodities traders worried about the taint of Russian oil.
Antoine Halff of Kayrros, a French data-analytics firm, confirms that European, Japanese and South Korean buyers are “not touching Russian crude”. But he hears whispers that some big trading houses might quietly be taking deliveries. Kayrros’s tracking reveals a huge increase in crude oil in transit over the past two weeks, which Mr Halff reckons represents Russian tankers rejected from their original destination looking for new buyers. All told, he thinks, 3m barrels per day (bpd) of Russian crude could be locked out of the market, out of a total of around 4.5m bpd before the war.
The obvious place to look for those barrels is OPEC. Mr Barkindo poured cold water on such ideas, stating in Houston that “nobody can replace” the possible loss in Russian output, which he put at perhaps 8m bpd including oil products: “The world does not have that much capacity.” Much of what little slack there is, perhaps 2m bpd-worth, is in Saudi Arabia and the United Arab Emirates. Far from rushing to join America, the leaders of these countries—unhappy with its policy in the Middle East—have reportedly refused even to take Mr Biden’s phone calls. (Mr Barkindo also made it plain that Russia would not be kicked out of the OPEC+ arrangement with non-members over its invasion of Ukraine, noting that the cartel remained neutral even amid war between its members—Iran and Iraq in the 1980s, and Iraq and Kuwait in 1990-91.)
If not the Arab sheikhs, what about American shalemen? Frackers can bring oil to market much faster than fellow drillers in the oil sands or offshore. After a collapse a few years ago, American shale output is expected to grow this year by perhaps 750,000 bpd. But even ramping up production further would not be enough to offset lost Russian crude. Scott Sheffield, boss of Pioneer Natural Resources, an American oil firm with big shale holdings, says the industry could increase output by 1.5m bpd within 18 months—but only if there is “a change in the Biden administration philosophy on fossil fuels in this country”. He says it will also require persuading long-suffering investors, who have lost billions in the past betting on profligate shale firms, that higher oil prices justify chasing production growth. And both Mr Sheffield and Vicki Hollub, chief executive of Occidental Petroleum, an American firm, point to supply-chain snags in everything from steel and fracking sand to lorry drivers.
That leaves strategic reserves. Last week the International Energy Agency (IEA), a quasi-official body representing energy-consuming countries, announced it would release some 60m barrels of oil held by its members, equivalent to 4% of their total reserves. On March 9th the IEA announced that it stood ready to release more. Although such stockpiles cannot make up for a permanent loss in Russian output, they could make a big difference for a few months, until the crisis cools down or alternative sources of supply kick in. Mr Halff, himself a former IEA insider, points out that the rise in oil prices on news of the initial release of 60m barrels suggests that it was “miserably too small” but that a bigger release of 120m barrels is technically feasible at a rate of 2m bpd or more. Mr Hess argues for an immediate release of 120m barrels this month, another 120m barrels next month and more later if necessary.
Oil prices may not, then, explode again in the short term. The price of Brent fell by over 5% on March 9th as the industry digested such considerations. But even if the Russian crisis is resolved fairly soon—a big if—the world may be stuck with a precariously balanced, deeply disjointed and volatile oil market for years to come. Prices could rise again. If they exceed $150 a barrel and stay high, reckons Ms Hollub, it would destroy demand—a prospect that, she says, is generating “a lot of apprehension and a lot of angst”.
This fear was palpable in Houston among oil bosses, who prefer both the supply and price of oil to be relatively steady. “I have never seen a more pessimistic group,” reports Bob Dudley, former boss of BP, a British supermajor, who now heads the Oil and Gas Climate Initiative, which unites energy firms apparently concerned about greenhouse-gas emissions. As Jack Fusco, boss of Cheniere, America’s biggest exporter of liquefied natural gas, told the energy grandees this week, “The turbulence has just begun.” ■