Why Russia’s War Drove Up U.S. Gas Prices - YouTube

Gasoline prices hit all time highs in March 2022.

In some places, such as in California, drivers were paying more than $6

at the pump. Diesel, which fuels the freight industry, also hit an all time

high. Jet fuel has also risen to startling highs, affecting the prices of

airline tickets and air freight.

Oil soared in late February after Russia invaded Ukraine.

Oil markets were already dealing with low inventories and rising demand as the world

slowly emerged from the coronavirus pandemic.

We've never seen prices increase this quickly.

We set a new record for the biggest jump in one week.

Russia is the world's third-largest producer of oil, plus it is part of the

influential Energy Alliance known as OPEC+ that includes many of the world's

biggest producers.

But the US barely imports any oil from Russia.

The United States goes through almost 20 million barrels of oil per day.

The US does import some petroleum products, but only about 8% of those

come from Russia. Even so, the U.S.

government banned all imports of Russian oil and petroleum products in early

March and the U.S.

is the largest oil producer in the world.

So why were fuel prices in America pushed upward by events on the other

side of the planet?

The reality of the situation is that you've got a global market

of supply and demand that is very, very tight.

So any sort of uncertainty about supply to the global market

sends the market into a tizzy.

And that's what we are seeing.

In 2021, the U.S.

produced an average of about 11 million barrels of crude oil per day.

So can domestic oil producers like ExxonMobil and Chevron just pump more

oil? An oil well is by far most productive right after it is

drilled. Soon after that, the pressure forcing oil out of the well drops

considerably and the oil flow slows to a trickle.

So the only way to significantly boost production is to drill new wells.

Drawing oil out of existing wells isn't efficient enough to make up for the shortfall, and

there are not many wells that haven't already been tapped anyway.

Nothing happens overnight.

It's a slow process to go find the oil.

Go do the exploration.

Drill the wells. And then produce.

So nothing happens in a period of less than 60 days.

60 to 90 days is the shortest that you can think of.

But that is pretty optimistic.

The last several years have presented the industry with some serious challenges.

The global pandemic and the boom and bust cycles of the last decade or so have pushed a lot of

people out of the industry.

That isn't very well qualified personnel available.

Many of them have left the industry because of the pandemic, and so the last seven years have been

really, really hard on the industry.

The troubles have also left investors wary of making big capital expenditures.

Nobody wants to give you money to explore, drill and produce oil because the

risk associated with it is too high because of all the climate risks

associated with oil and gas.

There's been a very strong pushback on the oil and gas industry as not being a very safe

place to put money.

The last couple of years have pushed oil companies to shift strategies.

After the pandemic, they saw a fundamental shift in their business models.

They are now focused on paying down debt, limiting capital expenditures, paying back

investors through dividends and buybacks, and basically not growing production.

They've said that they're going to grow between zero and 5%.

So essentially keeping it flat.

And basically they were burned for a long time by lower oil prices.

And the more they pumped, the lower oil prices actually went and then the pandemic served as this

reset for them and they don't want to return to that.

There are also some concerns that investments made now won't pay off.

There is a long lag time between when you decide to pump more and when that well is up and running.

That can be between six and nine months.

So even though prices are really high right now, producers are saying we're not sure that's going to be the

case six months or a year from now.

So we don't want to start producing right now and then run the risk of when our oil hits the market.

The Russian invasion of Ukraine will be passed, news and prices will be back down.

That does not benefit them, so they don't want to open the taps.

Foreign producers have also been pulling back, most notably the OPEC+ alliance, which

of course counts Russia among its members.

Those countries lowered output after they were burned by cratering demand in 2020.

That sent oil prices into negative territory for the first time in history.

The last thing they want to do is put out more oil than the market can handle,

and they've probably been too disciplined up until

the beginning of this year.

Now we'll see what happens.

Petroleum is thought of as a commodity, but there is actually a great deal of variation in the product

depending on where it comes from.

The crude oil is kind of like Cabernet.

There's about 125 different varieties of it.

Two varieties serve as benchmarks for oil prices.

Brent crude comes from oil fields in the North Sea of northwest Europe between

the U.K. and Norway.

It is the international standard.

WTI, or West Texas Intermediate, comes mostly from oil fields in

the Permian Basin and is priced in Cushing, Oklahoma.

It serves as a benchmark for other crudes from the US and elsewhere in North and

South America. WTI and Brent crude typically trade within a few dollars of

each other per barrel, both of them sort above $130 a barrel when oil

prices hit their peak after the invasion.

Both WTI and Brent are light sweet crudes.

A light crude means the oil is less viscous.

It flows at a faster rate.

If a crude is called sweet, the oil contains lower levels of sulfur.

Because of this, it is relatively cheap and easy to refine into high value products like

gasoline and diesel fuel.

But there are many other crudes, such as the heavy sour crude that tends to come from Russia.

There is also Venezuelan heavy crude and so on.

These tend to trade at a steep discount to Brent and WTI.

They are generally cheaper because they're heavier grade and higher sulfur content makes them more

difficult and expensive to refine.

However, a refinery can be designed to process these heavier forms of crude oil rather

efficiently. Jet fuel is heavier and generally higher value than

diesel, and diesel is heavier and higher value than gasoline.

Furthermore, many U.S.

refineries, particularly along the Gulf Coast, are designed to run most efficiently,

processing a heavier form of crude oil, not the lighter crudes the US has

mostly been producing.

That is largely because most U.S.

fuel refineries are pretty old and were built before the U.S.

started pumping large amounts of light crude.

The expectation was we would get into producing heavier crudes.

Heavier sour crudes would be the norm until we hit the shale

revolution. And the shale revolution essentially suddenly said that's not necessarily

going to be the place where we will see growth.

In fact, we will see growth with natural gas liquids and the lighter sweet crudes that

come out of the or the shale plays.

Because U.S. refineries were designed and built before the US oil boom, some

amount of heavy sour crude has to be imported from places like Russia to run U.S.

refineries most efficiently.

It will likely be that way for a while.

The United States has not built any new true, crude oil refineries of

significant size since 1977.

The United States also imports some refined petroleum products, such as gasoline

from other countries, including Russia.

That is often because certain regions of the country don't always have the refinery

capacity to meet local demand.

That can happen if, say, a refinery shuts down due to a fire or a

natural disaster.

In cases like that, domestic producers might not be able to pipe oil or gasoline from

one region to another.

There's also, of course, the Jones Act, which requires that any products going between US ports be on a

US flagged and built ship.

So that also limits how much crude can be exported from the Gulf Coast.

That often makes it more expensive than simply shipping the oil from another country.

So it's a it's a complicated market, right?

Politicians have for years said the country's oil output would push it toward

energy independence.

But energy independence doesn't really mean what it might sound like.

But you still need some of the feedstocks that make money or some of the high octane

components that you import.

So we're always going to be importing, importing and exporting.

But I think the balance of trade is going to work in our favor, particularly with crude oil.

So the U.S. is a net exporter of energy, but the U.S.

is still part of a global energy market, just like every other major oil

producer.

Oil is a global commodity.

We can't fence the U.S.

or take us out of that global system, just like we're seeing computer chip shortages.

But we can't remove ourselves from that situation either.

Even if we produce some computer chips here, it doesn't fix what's going on outside our borders with drastic

impacts to supply and demand.

And so the price of oil is affected by events in just about any oil producing country

can and do shock the global system.

Saudi Arabia back in 2019 saw a terrorist attack that knocked out 6 million

barrels of oil and gas prices surged.

Now we're seeing Russia attack the West and sanctions which are imperiling the

flow of oil are causing prices to skyrocket.

And we've seen hurricanes here in the U.S.

that have caused oil prices to jump on the fact that they a hurricane has shut down

oil production.

In 1973 and 1974, the then members of the

Organization of Petroleum Exporting Countries, known as OPEC, placed oil

embargoes on the United States in retaliation for its support of Israel in the

Arab-Israeli war.

The U.S. suffered shortages of gasoline severe enough to warrant the creation of the

Strategic Petroleum Reserve.

That's a cluster of storage facilities in underground salt caverns along the Gulf

Coast. The SPR is authorized to hold up to about 700 million

barrels of oil. It amounts to about a 30 day supply for the entire country.

Since oil prices started to rise.

That's led to an increase in gas prices, and that is a headache for any official.

And Biden has said repeatedly that his administration is working to bring prices down.

So one of the tools at their disposal is tapping the Strategic Petroleum Reserve.

The government tapped the reserve to address rising prices back in November 2021.

50 million barrels of crude from the Strategic Petroleum Reserve.

And it had a kind of short term effect, but it didn't really do much in the long run.

President Biden committed to releasing 90 million barrels in 2022 to

offset potential market shocks.

On March 16th, President Biden called on oil and gas companies to roll back prices.

Gasoline prices tend not to fall as quickly as oil prices, in part because retailers are

trying to recoup losses they suffer when prices rise.

The winners have been the exploration and production companies, even with the setbacks recently.

The breakeven price for crude is about $25 a barrel.

So everybody can do the math.

The losers were probably the retailers, and there's 140,000 of them.

They get blamed for the prices above $4.

But the reality is they make a lot more money when wholesale prices collapse or

crude oil prices collapse and they really suffer on the way up.

Higher prices carry risks for oil producers as well.

There's a point at which oil simply becomes too high.

And when we see oil at 130, not only does the administration then ask drillers,

why aren't you drilling, but it also runs the risk of tipping us into a recession.

And a recession is not good for anyone because that means the global growth slowdown, which will, of course weigh

on oil demand.

Sooner or later. Higher prices tend to motivate competition, which in turn tends to push prices

down. But this situation brings many questions.

Obviously, Putin has done a lot of damage to the Russian economy.

And even if even if he did sign a peace treaty tomorrow, there's a lot of reluctance on the side of

Americans to maybe get involved with Putin and Russia again.

And that's going to have a profound, long lasting impact.