First Domino: Biden's Ban on Russian Oil Will Trigger Dangerous Chain Reaction, Say Energy Experts

"Biden's decision is insane and rash, because it has already led to rising oil prices - up further than before - and that will cause a very adverse impact on the global economy - particularly the United States economy," says Dr Mamdouh G Salameh, international oil economist and visiting professor of energy economics at ESCP Europe Business School in London. "As a result, gasoline prices in the US have risen for the first time to more than $4 a gallon. And of course, that will fuel an already rising inflation… it reduces the purchasing power of the ordinary American."

It is expected that if oil prices remain elevated, then for the rest of 2022, the average American family would pay approximately $2,000 more for gasoline than a year earlier, echoes Justin Dargin, a global energy and carbon market expert at the University of Oxford.

"The primary issue is that a rise in energy prices also has a broad impact on other essential goods, which reinforces the main inflationary trends that existed before the oil price spikes, which creates a vicious cycle," Dargin added.

Why Banning Such Small Russian Imports Has So Mighty An Effect

The US' imports from Russia make up a relatively small proportion of total imports:. according to the Associated Press, Russia accounted for roughly 8 percent of US imports of oil and petroleum products last year. "In total, the imports reached the equivalent of 245 million barrels in 2021, which was roughly 672,000 barrels of oil and petroleum products a day," the news agency notes, adding that US imports of Russian crude had dramatically declined by the end of the year.

According to the US Energy Information Administration (EIA), in December 2021 the US imported only 90,000 barrels per day (bpd) of oil from Russia. For the sake of comparison, last October and November respectively, the US imported 206,000 bpd and 186,000 bpd from Russia. However "small" Russia's share in the US energy market is, Washington has no other option but to rapidly substitute it with some other supplies, according to Salameh.

Gasoline prices are shown as they continue to rise in Carlsbad, California, U.S., March 7, 2022

Moreover, banning Russia's relatively modest oil imports to the US has nevertheless had "a stark impact on global prices" and "could potentially lead other countries to initiate similar bans, further entrenching volatility in the global energy market," warns Dargin, adding that the Biden administration has few if any possibilities of halting the spike.

Earlier, the US Energy Department announced that it would release 30 million barrels of oil from the Strategic Petroleum Reserve (SPR) in yet another effort to satisfy the global market as part of a coordinated effort among the 31 members of the International Energy Agency (IEA). Other IEA member countries collectively pledged to release an additional 30 million barrels of crude from their emergency reserves, bringing the total release to 60 million barrels.

"The White House’s announcement that it would release 30 million barrels of oil from the Strategic Petroleum Reserve had only a negligible effect on domestic oil prices as it represents only about one to two days of US domestic oil consumption, not enough to make any appreciable difference," says Dargin.

Furthermore, before the unfolding energy crisis, the Biden administration had made an effort to curtail American oil output to meet its climate goals, the energy expert says, clearly referring to Biden's shutting down of the Keystone XL pipeline, among other measures.

The White House has been placed between a rock and a hard place as it does not want to step up its own oil production because of its "green" agenda, according to Dargin. Indeed, the White House has recently rejected US congressmen's calls for reviving the Keystone project and White House press secretary, Jen Psaki, claimed on Monday that "[Keystone] actually would have nothing to do with the present supply imbalance."

The LNG tanker "Clean Ocean" is pictured during the first U.S. delivery of liquefied natural gas to LNG terminal in Swinoujscie, Poland June 8, 2017

Oil's Domino Effect on Natural Gas

Meanwhile, US natural gas prices are also soaring, though not at the same pace as European ones. Europe's post-COVID energy crisis can largely be explained by the continent's shift from long-term to spot contracts as well as tough anti-Russian sanctions which hit the country's financial sector and logistics. In contrast to Europe, the US is not dependent on Russia's pipeline gas supplies. What, therefore, is behind the hike?

"As a general rule, natural gas prices track those of oil prices. Therefore, significant fluctuation in the oil sector tends to place upward pressure on natural gas prices as well," says Dargin. "The ban on Russian oil exports to the US will have a ripple effect across the broader energy sector as other Russian financial sectors associated with the energy sector are also targeted, which, though not having a direct impact on structural supply flows, will still place upward pressure on natural gas prices because of the overall financialisation of the sector."

Overall, as with oil prices, one can expect to see price increases in the natural gas sector which will increase the electricity prices that American consumers ultimately pay, as well as the more than 6,000 consumer products produced from the downstream natural gas sector, such as petrochemicals, according to Dargin.

At the same time, the US cannot "increase its hydrocarbon production at a moment’s notice," to cater to inner market demand and settle the prices, Dargin says.

"It's easily said that the United States can raise its production of natural gas. In fact, American natural gas has not been growing for the past two or three years," echoes Salameh.

A sign in Steele City, Nebraska where the Keystone XL pipeline would terminate

At Least 5 Years Needed to Stabilise Energy Prices

The solution for America's mounting energy prices is to solve the global economy and that, in turn, will have to wait for armed conflict in Ukraine to end, says Salameh.

"Either the global economy cuts its demand for oil or producers will have to raise their production," the energy expert says. "The question is the global economy is in a very robust situation, so it will induce more global oil demand. Then we face the problem of whether producers around the world are able to increase their production. There is already a shrinking global spare production capacity - including OPEC's. And that means it will take quite a while before the producers can raise their production significantly."

According to Salameh, the additional production of crude will most probably come from Russia, the Middle East and Venezuela. Washington's present attempts to get more crude exports from Venezuela appears futile, since the Latin American country produces 1.2 million barrels a day because the US' crippling sanctions dealt a heavy blow to the country's oil sector over the past few years. "Furthermore, even if it has enough to export to the United States, it would demand a price - and a heavy price - which is lifting the sanctions against them," Salameh notes.

It will take up to five years to substantially increase global oil production, according to Salameh. He explains that since the COVID pandemic, because of pressure from environmental activists and the EU's rash policies to accelerate renewables at the expense of oil and gas, there has been under-investment in the production of hydrocarbons.

"So we need investment at the level it was in 2019 for at least five or 10 years, to be able to lift production to meet or to keep the balance in the market between supply and demand. This means that I am expecting prices to continue rising between five and 10 years from now," Salameh concludes.

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