Why is the Russian oil issue affecting American gas prices?
Russia exports a major fraction of its oil to Asia and Europe. But it’s noteworthy that when we discuss the rising oil prices, we should look at the global oil supply rather than just the American gas prices. The commodities market is interconnected globally, and the oil prices are dependent on the global market. Therefore any incident in one part of the world undoubtedly affects other areas.

Russia being the world’s largest oil supplier, just to highlight this scenario in December, Russia exported around 8 million oil barrels and other petroleum-related products to the world. This included 5 million crude oil barrels used to make gasoline and other petroleum products. As per the fact, the very meager amount of Russian supply goes to the US, about 90,000 barrels of crude oil per day in December as per the latest US government statistics.

But it’s noteworthy that oil is bought and shipped all over the world via a global commodities market. So due to this factor, it doesn’t matter much who is getting crunched by the low supply of Russian oil; any decrease in the supply further affects the global prices regardless of any other factor. And as per Econ 101, it’s simple to understand when the supply of a highly in demand item is less, the prices rise. Why is the reason behind the low Russian supply?

Firstly the West, comprising the US, exempted Russian oil & natural gas from the sanctions they had levied. The US administration reversed its stand on Tuesday, banning oil from Russia and other fuel imports to the US, whereas the UK stated that it would try to phase out the Russian oil imports by this year’s end. The European Union is in a tougher situation since they are highly dependent on the Russian oil supply.

The initial lack of formal bans didn’t matter much in price changes. In fact, there has been a de facto ban on Russian oil imports after its invasion of Ukraine, due to which most of its oil supply is lying unsold.

Oil traders are highly nervous to touch upon this stuff. There’s high uncertainty regarding buying Russian oil; this may be due to the sanctions imposed on the Russian banking system, creating payment issues. Finding tankers who are willing to visit the Russian ports for shipping the oil due to the dangers of the war is also one of the issues.

Therefore, Russian oil exports to Europe are highly impacted, and they have to sell it at a high discount because nobody is buying it. JP Morgan has observed that above 4 million Russian oil barrels per day are affected due to this situation. Eventually, the investors are pricing the oil at high prices due to a lack of Russian supply, which ultimately leads to less supply and higher prices.

Why can’t other countries pump out more?

Due to the impact of Covid, the oil supplies were reduced globally in 2020. This had harsh impacts that the oil was trading at negative prices briefly. The OPEC+ heavily cut down their production to sustain the prices to address this. The production targets were low since then, which gradually started to increase. Russia is also part of OPEC+; therefore, it isn’t hurrying up to solve the issue. The Saudis have made it very clear for around months, even before the Russian invasion, that they do not plan to open up the oil taps anytime too soon.