How Long Will Oil Prices Stay High?

Russia’s invasion of Ukraine has created a series of disasters, including civilian casualties, millions of refugees, and the destruction of historic cities and towns. In response, dozens of nations have banded together to impose sanctions on Russia. Banks have been removed from the global payment system, international brands have cut off business with Russia, and the United States and United Kingdom have prohibited the import of Russian oil. 

Most of the economic sanctions imposed on Russia – and the sanctions Russia then imposed in return – have little impact on the day-to-day lives of Americans. However, when the balance between supply and demand for oil begins to shift, there are immediate consequences for average US citizens. 

Even the possibility of a change in oil supply causes price volatility, and that sends the cost of gas and diesel fuel soaring. Americans are paying more to fill up their personal vehicles, and industries involved in transportation – shippers, truckers, airlines, etc. – are faced with rising expenses. They now have to make tough choices between profitability and passing fuel costs on to consumers in the form of higher prices. 

All of that against a backdrop of rising inflation has consumers anxious. Their confidence is dropping, which is a sign that economic activity will start to decline. Some analysts are beginning to worry that today’s high oil prices are the precursor to a recession.

The big question is, how long will oil prices stay high? If the situation is temporary, economic damage can be minimized. However, if oil prices stay high for weeks or months, the risk of recession grows.   

What Country Is The Largest Exporter Of Oil? 

Saudi Arabia takes first place when it comes to oil exports, but Russia is a close second. In 2019, Saudi Arabia exported $145 billion worth of crude oil, with Russia following at $123 billion. China is one of Russia’s top customers, buying roughly a quarter of the oil Russia sells on the international market. 

A handful of other countries are heavily reliant on Russian oil. For example, Belarus, Kazakhstan, Latvia, Curacao, and Cuba get 99 percent of the oil they use from Russia.

The United States is on the other end of the spectrum. The US is the world’s largest oil producer, and most of that is consumed domestically. The US doesn’t rely on Russian oil, and in fact, only three percent of its imports come from Russia. 

However, the European Union is in a more difficult position. While their use of Russian oil doesn’t rise to the same level as Belarus or Cuba, EU countries can’t cut off imports with the same ease as the United States. The European Union purchased nearly 50 percent of Russian oil exports in 2021, and Russian oil makes up approximately 25 percent of member nations’ total consumption. 

What makes the situation even more complex is that Russia supplies the European Union with 40 percent of its natural gas.

Russia’s leadership said that if the EU bans imports of Russian oil, Russia will no longer sell natural gas to the EU’s member nations. That would create an immediate crisis for EU citizens. 

In short, the sheer volume of oil that the EU imports from Russia would be difficult to replace – at least in the short-term – but that doesn’t mean that such a ban is off the table. This uncertainty has contributed to recent volatility in oil prices, and every new war-related headline has the potential to push global oil prices up. 

Why Did Oil Prices Go Up? 

The US and UK bans on Russian oil barely impacted Russian oil exports, and the EU hasn’t made any major moves to reduce Russian oil consumption. So far, the country has been able to shield its energy industry from the consequences of its war in Ukraine. Or has it? 

In fact, Russian oil exports have suffered because of the various sanctions and bans against the country, though the sanctions and bans were generally designed to leave Russia’s oil industry untouched.

Much of the oil Russia has produced since the invasion of Ukraine remains unsold, and the oil that was successfully exported went at a discount.

So, why did the price of Russian oil go down? 

The logistics of buying, transporting, and delivering oil are exceptionally complicated. Specialized tankers are required, and many of these are unwilling to pick up cargo in Russian ports for a variety of reasons. There is a legitimate concern that receiving ports will refuse Russian oil, and of course, transporting anything in a war zone is dangerous. 

On top of that, some Russian banks have been excluded from the global banking system, and more could be added to the list at any time.

Oil traders can’t be sure that deals will close smoothly, making any transaction involving Russian oil risky. The practical result is that a substantial amount of Russian oil has been removed from the global marketplace – and any decrease in supply without an equivalent decrease in demand causes prices to go up. 

How Long Will Oil Prices Stay High? 

For the moment, demand for oil is unlikely to decrease – that’s more of a long-term goal. Therefore, the biggest consideration in short-term oil prices is whether the supply will stabilize. Unfortunately, the big questions like how long will oil prices stay high are hard to answer given the many factors that contribute to oil supply. 

The most obvious solution for bringing the global oil supply back to previous levels is an increase in production. However, that’s easier said than done. Yes, the United States is the world’s largest oil producer, but an overnight increase in production isn’t a viable option. 

First of all, though the country is finally recovering from the challenges of the COVID-19 pandemic, skilled workers are still in short supply – and so is the specialized equipment required by the oil industry.

Challenges with staffing and issues with the supply chain are just a small part of the problem. Oil producers around the world were in crisis at the start of the pandemic, and those that survived are still living with the wounds inflicted by the near-catastrophe. 

In April 2020, oil prices went below $0 for the first time in history due to a combination of factors, including a sudden, dramatic decline in demand as COVID prompted stay-at-home orders. No one wanted to buy oil, and in a very real way, oil producers were actually paying to offload their excess supply because they had no place to store it. 

Among other responses, the Organization of the Petroleum Exporting Countries (OPEC), which is led by Saudi Arabia, agreed to lower production to encourage price stabilization. For the moment, OPEC has signaled that it doesn’t intend to increase its production – perhaps in part because Russia is an affiliate. 

Will Oil Prices Go Down? 

There are other options for increasing the global supply of oil – and decreasing global oil prices – but they aren’t especially easy to implement.

Three countries hold roughly half of the world’s proven oil reserves:

  • Venezuela (303.8 million barrels),
  • Saudi Arabia (258.6 million barrels); and
  • Iran (208.6 million barrels).

But two of the three aren’t generally included in the global community. 

Venezuela is a founding member of OPEC, and at one time, it was one of the world’s largest oil exporters. In 2014, political changes disrupted Venezuela’s oil industry, putting it in danger of collapse. US sanctions prohibiting the import of Venezuela’s oil pushed it over the edge. As of September 2021, the country’s oil production declined almost 83 percent from its pre-2014 peak.

Since the Russian invasion of Ukraine, there have been indications that the US is reconsidering sanctions on Venezuelan oil. Unfortunately, the current state of the Venezuelan petroleum industry means it couldn’t immediately contribute to global supply even if sanctions are lifted. Estimates for the country’s return to full production range from two months to seven years, depending on the source. 

Iran is also the subject of US sanctions that were lifted in 2015 and reinstated in 2018, preventing Iran from contributing to the current decrease in oil supply. However, there are signs that the United States is exploring opportunities to bring Iranian oil back to market. Should the countries reach an agreement that permits sanctions to be lifted, Iran may be able to make up some of the missing Russian supply. 

The bottom line is that with supply constrained and demand not waning, oil prices are likely to remain elevated in the near-term.

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