Why Oil and Gasoline Prices Have Nowhere To Go But Up From Here

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Russian oil minister Alexander Novak warned Tuesday that global oil prices could hit $300 per barrel in the event of an import ban. Novak went onto suggest that Russia could shut down the Nord Stream 1 pipeline, which supplies much of Europe’s natural gas needs, in retaliation for a ban.

Despite these warnings, U.S. President Joe Biden announced at mid-day that he would implement a ban on U.S. imports of Russian crude. Thus far in 2022, the U.S. has averaged importing less than 100,000 barrels of oil per day from Putin’s country, so this is the proverbial drop in the old oily bucket in terms of volumes impacted. But, as Jesse Wheeler, analyst at Morning Consult notes, “Even though the U.S. does not import a lot of oil directly from Russia, oil trades on a global market, and the partial eviction of the world’s third largest exporter will drive up prices everywhere.”

Markets reacted to news of the U.S. ban by driving crude prices up to highs not seen since 2008. West Texas Intermediate was trading above $127 per barrel in mid-day trading, while the international Brent price was over $131.

Tuesday’s events point to the accuracy of statements by Tesla founder and CEO Elon Musk over the weekend, in which the electric vehicles innovator said that “”Hate to say it, but we need to increase oil & gas output immediately. Extraordinary times demand extraordinary measures.”
Two days later, Musk also pointed to the need for increased nuclear energy, tweeting “Hopefully, it is now extremely obvious that Europe should restart dormant nuclear power stations and increase power output of existing ones. This is *critical* to national and international security.

Unfortunately, due to a variety of factors, the U.S. oil and gas industry appears unable to quickly step into this breach and raise domestic production. Mace McCain, Chief Investment Officer at Texas-based Frost Investment Advisors, said in an email that “U.S. energy supply doesn’t appear to be prepared to bounce back like it has in the past when prices rose. U.S. shale drillers are challenged with shortages in labor, materials and equipment. Many marginal producers are being more financially conservative rather than leveraging to expand aggressively as they have in the past. The U.S. oil rig count is currently at 520, after hitting a low of 295 a year ago. We are still well below the 2014 high of 1,609 rigs operating. The oil majors are reluctant to increase exploratory spending by the big producers, a trend that’s been growing since 2015. With global inventories low and OPEC+ nations limited in their spare capacity, all signs point to an oil market that is incapable of responding to higher prices with compensatory supply, at least in the near term. This likely means that supply will stay tight and prices will remain elevated for the foreseeable future.”

McCain is right: Where oil supply is concerned, the world’s consumers face a bleak situation. Should Europe join with the U.S. in banning Russian crude imports, the effect would be to remove several million barrels of production per day from an already-under-supplied market. Due to years of under-investment in the finding of new reserves and irrational government policies that have constrained the U.S. and global industry, no country, not even Saudi Arabia has the ability to quickly ramp up its own production in a way that would substantially offset lost Russian production.

As Kym Bolado and I discussed on last week’s “In The Oil Patch Radio” show, we are now entering a situation in which we will soon think of $100 oil and $4.00 per gallon gas prices as pleasant memories. There is nowhere for either price to go but up from here.

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