Surge in Oil and Natural Gas Prices | 21 Mar 2022

Why in News?

Recently, the U.S. announced the banning the import of Russian oil, liquefied natural gas, and coal to the country.

• The move is aimed at depriving Russia of the economic resources needed to continue its war in Ukraine.
• In the run up to the U.S. announcement, international oil prices surged to a 14-year high with Brent crude futures hitting USD139.13 intraday.

What are the Reasons for Targeting Russia's Energy Exports?

• Largest Oil Producer:
  • Russia is the world’s third-largest oil producer, trailing only Saudi Arabia and the United States.
    • In January 2022, Russia’s total oil production was 11.3 million barrels per day (mb/d), of which 10 mb/d was crude oil, according to the Paris-based intergovernmental International Energy Agency (IEA).
• World's Largest Exporter of Crude and Oil Products:
  • Russia is the world's largest exporter of crude and oil products, having shipped 7.8 mb/d in December 2021, and the second largest supplier of crude to the world with only Saudi Arabia exporting more crude than it.
• Major Exporter of Natural Gas:
  • Russia is also a major exporter of natural gas and supplied almost a third, or 32%, of the gas consumed in Europe (and the U.K.) in 2021.
    • The revenue it made from the sales of oil and gas in 2021 accounted for 36% of Russia's total revenue of 25.29 trillion rubles last year.

What will be the impact of the Move on Russia and on Global Crude Prices?

• Given that Russia exported substantially more than 7 million barrels per day of crude and oil products in 2021 the U.S. ban would impact about one-tenth of Russia's oil exports.
  • Also not all of its allies and partners around the world were currently in a position to join in its import ban.
  • Among its allies, the U.K. announced that it would phase out the import of Russian oil and oil products by the end of 2022.
• Still, without the rest of Europe and China joining the import ban on Russian oil and gas, the impact would not be as severe on Russia's economy.
  • China, which is the world's largest importer of crude oil, is Russia's single-biggest buyer.
  • OECD Europe (or European members of the Organisation for Economic Co-operation and Development) collectively accounted for 60% of Russia's oil exports.
• An already tight oil market had been pushed over the edge with the loss of Russian supply of about 1.5 mb/d (Millions of Barrels per Day) of its benchmark Urals crude and about 1 mb/d of refined products.
  • Urals is the most common export grade of crude oil from Russia and an important benchmark for the medium sour crude market in Europe.

How can it impact India?

• India is the world's third-largest oil consumer at 5.5 million barrels a day, behind the US and China.
  • The oil demand is growing at 3-4% a year in the country.
• By this estimate, in a decade, India could be consuming about 7 million barrels a day.
• India imports 85% of its oil from about 40 countries, the bulk coming from the Middle East and the US.
• From Russia, India imports 2% of its supplies, including oil which it converts to petroleum products after refining. So, it’s not Russian oil but oil in general and its rising prices that have India worried.

Way Forward

• Currently, oil prices are treading water as investors worldwide await the outcome of the U.S. Federal Reserve, and energy traders keep an eye on demand in China, where a recent upsurge in Covid-19 cases has triggered targeted lockdowns in some parts of the country.
• If the U.S. Federal Reserve raises interest rates, as is widely expected, the dollar is likely to strengthen, thereby making imports of oil costlier for net energy importers such as India.
• India, the world's third-largest energy-consuming and importing nation, is pinning hope on resumption of crude oil supplies from Venezuela and Iran as well as higher production from OPEC nations to help cool international oil prices that have hit multi-year highs.
• It will also evaluate the Russian offer to sell crude oil at discounted prices after considering aspects such as insurance and freight required to move the fuel from the non-traditional supplier.

Source: TH