March 2022 – By Bob Veres
If there is one significant fallout that most economists expect to land on American consumers as a result of the war in Ukraine, it is higher gas prices. Prices tend to reflect supply and demand, and if there are sanctions on Russia’s ability to export oil, that will reduce supply without any anticipated change in demand. It is estimated that roughly 2.3 million barrels a day of Russia’s 4.6 million output flows to Western nations.
And, indeed, spot crude oil prices rose above $105 a barrel right after Russian troops crossed the Ukrainian border—the first time we have seen prices over $100 since 2014. But pundits who were predicting $10 a gallon prices at the pump received a bit of a jolt on Friday, when oil futures contracts actually showed declining prices. The April Brent crude futures fell 1.2% and the more active May contract fell 1.4%.
What gives? The Western sanctions actually don’t prohibit nations or corporations from buying Russian oil and gas; they are simply making it harder for Russia to transact business with any national or corporate trading partner. By locking Russian banks out of the global financial system, the U.S., Europe and Japan have essentially prevented the nation from executing transactions in U.S. dollars—which are the currency that everybody uses to buy and sell pretty much anything across borders. Oil buyers are reportedly struggling to secure guarantees at Western banks. But utilities that really need oil and gas are expected to figure out some kind of workaround. In fact, Russia is in the process of introducing a digital ruble, its own cryptocurrency, that would allow countries to buy oil and gas without the inconvenience of converting to dollars.
Beyond that, the Western nations all have stockpiled strategic petroleum reserves, putting more supply on the market and mitigating price increases—and there is an estimated 1.5 billion barrels available to tap. So far, the United States has released about 50 million barrels of oil through sales and exchanges—less than a tenth of what it can call on if needed.
Finally, there is some hope that the OPEC nations will fill in the gaps. So far, the Middle Eastern oil exporters have pledged not to open their spigots. But if oil prices do drift higher, there will be a strong temptation for them to take advantage—long before we see $10/gallon prices at the pump.
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