Why are US gas prices rising when America barely uses Russian oil?

First, the West, including the US, exempted Russian oil and natural gas from the sanctions they imposed. The Biden government reversed course on Tuesday, banning Russian oil and other fuel imports to the US, while Britain said it would phase out Russian oil imports by the end of the year. (The EU is in a more difficult position in this respect because it is far more dependent on Russian oil.)

But the initial lack of formal bans played no role in price anyway. There has been a de facto ban on Russian oil since the invasion began, with most of the country’s stocks remaining unsold.

That’s because oil traders are incredibly nervous about handling the stuff. There’s a lot of uncertainty in buying Russian oil, whether it’s the ability to do deals in the face of sanctions on Russia’s banking system or finding tankers willing to call at Russian ports amid shipping hazards in the war zone.

As a result, the main grade of oil that Russia exports to Europe is on sale at a significant discount because no one wants it. JPMorgan recently estimated that more than 4 million barrels a day of Russian oil were effectively being marginalized.

So investors are basically pricing oil as if Russia’s supply weren’t available at all. And again less supply = higher prices.

Why can’t other countries pump more?

Good old Covid strikes again. No one wanted oil in general in the spring of 2020, when global lockdowns meant no one had to fill up and go to the office. With the collapse in demand, so did oil prices – and were even traded at negative prices for a short time.

OPEC+, in turn, severely curtailed production to support prices. And they’ve kept production targets low ever since, only gradually resuming production even as demand for oil and gasoline picked up sooner than expected.

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Guess who is part of OPEC+? Russia. So yes, OPEC+ is not rushing to the rescue. For months before the invasion, the Saudis had made it absolutely clear that the company had no plans to open the oil taps anytime soon.

However, this iron resolve may or may not crack. In a confusing development this week, the United Arab Emirates’ ambassador in Washington told CNN that the country wants to increase oil production and will encourage its partners in OPEC+ to do so. But later, the UAE’s energy and infrastructure minister tweeted that the nation would stick to its OPEC+ deal and gradually increase production.

And then the Iraqi Oil Ministry said its leaders met and agreed that its OPEC+ partners should balance supply and demand to stabilize the market. At this point, who knows.

So why can’t US oil companies ramp up production?

Russia was the world’s second-largest oil producer in 2021, pumping 9.7 million barrels per day — but the US is No. 1 at 10.2 million. American companies are not complying with these OPEC-style nationally mandated production targets. But US oil producers can’t or won’t fill the supply gap, although given high prices and demand they could make a coin.

Here, too, Covid strikes. Like many industries during the pandemic, oil producers are struggling to find staff and acquire specialized equipment. Meanwhile, US oil companies are still suffering the pain of that big 2020 oil bust that triggered a spate of bankruptcies. The stock performance of the oil majors has also lagged the broader market since then. And as fossil fuel producers, they are concerned that future environmental policies could hurt future demand for oil.

All of this underscores how oil and gas prices are linked to geopolitical events, the pandemic, drilling logistics and more. And it adds up to average US gas prices in excess of $4.33 a gallon as of Friday.

In short, it’s all a simple case of supply and demand. But of course it’s never that simple. Why are US gas prices rising when America barely uses Russian oil?

Dais Johnston

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