US President Joe Biden last month banned Russian oil, LNG, and coal imports. This was the right thing to do. While we only get 3% of our petroleum supplies from Russia, it’s important to lead the world in a unified front against the war that country is waging in Ukraine. The UK has also shunned Russian crude, but the European Union (EU) has so far resisted doing so.
The removal of potential destinations for Russian crude effectively removes the crude itself from the market. The more destinations that can be removed from the list of options the better in terms of giving economic sanctions against Russia teeth.
Given that Russia is the world’s second largest exporter of crude oil (5 million b/d) behind only Saudi Arabia, the absence of even the barrels thus far denied has added to the supply dislocation global consumers were already struggling to address. An EU ban would almost certainly push prices higher still. Europe gets roughly 25% of its crude from Russia. These barrels would have to be replaced in an already undersupplied market. Yet this must also be done.
The domestic political stakes for the Biden administration in the current circumstances are huge. It has held only one oil and gas lease sale for drilling on federal property since taking office and is being blamed for the price increase that’s already occurred. His approval rating is plummeting accordingly. Results of the offshore sale, held in November 2021, were invalidated by a federal court 2 months later. The court said the administration needed to run additional calculations on the leasing plan’s potential contributions to emissions. No onshore lease sales have occurred.
Large infrastructure investments and long-term capital spending plans require a degree of regulatory certainty for companies to be comfortable directing their funds in these directions rather than towards share buy-backs, dividend distribution, and debt retirement. But the very idea of regulatory certainty has become increasingly tenuous given the last two administrations’ penchant for ruling by executive order. And the notion that plans to drill for, transport, and process oil 10 or more years in the future will bring down prices now is dubious at best.
Lots of acres
More than 26 million federal onshore acres were under lease at the start of 2021. Those acres are responsible for 7-10% of onshore US oil production each year, the balance coming from state or private land.
Nonetheless, the argument continues to be advanced that it is the Biden administration’s policies which are preventing new drilling from occurring and thereby raising prices. According to adherents to this belief, the industry is reluctant to develop already existing federal leases since it doesn’t know when new leases will become available. Evidently the fear of what’s going to happen to this 7-10% of its output has put it in a state of paralysis regarding how to handle the other 90% of its domestic business.
Drilling rig counts peaked at more than 880 in November 2018 and had been in a state of slow decline until collapsing in late March 2020 in response to the COVID-19 pandemic. The bottom was reached in August 2020 and rig counts have been increasing steadily since, climbing for a record 19 consecutive months. Upstream capital spending plans (as examined starting on p. 22 of this issue) indicate that this increase is likely to continue, with a 30% jump expected in the US.
Pres. Biden has also committed the US to supplying an additional 15 billion cu m/year (bcmy) of LNG to Europe over the course of 2022 (vs. 2021 levels) with total exports to reach 50 bcmy by 2030. Once again this is the right thing to do, despite the already shrill opposition coming from the environmental wing of his base. The United States’ role as defenders of freedom and democracy must come before domestic political concerns.
