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(CNN) – There’s pain at the pumps for American drivers as U.S. gasoline prices hit record highs.
Although the US barely uses Russian oil, Russia’s invasion of Ukraine is still a big factor in skyrocketing gas prices, among other reasons.
Confused? We will guide you.
So why is Russian oil affecting the United States?
Most Russian oil is destined for Europe and Asia. But the key here is to think about oil supply globally, rather than the United States specifically. The world of raw materials is highly interconnected and the price of oil is set on a global market. Thus, what happens in one region of the world can affect another.
The current problem is that Russia is one of the biggest oil suppliers in the world. In December, for example, Russia sent nearly 8 million barrels of oil and other petroleum products to world markets, including 5 million barrels of crude oil used to make gasoline, among other things.
And yes, it’s true that very little of that Russian supply is going to the United States – just 90,000 barrels of crude oil per day in December, according to the most recent US government statistics.
In 2021, on the other hand, Europe obtained 60% of Russia’s oil exports and China 20%.
But remember, oil is bought and shipped around the world through a global commodity market. So in that sense, it doesn’t matter who is specifically crushed by the loss of Russian oil, because the drop in supply affects those world prices no matter what. And as we know from Econ 101, when there is less supply of an in-demand item, prices go up.
For example, if Europe buys less oil from Russia, it will have to replace it with oil from elsewhere – perhaps from the powerful Organization of the Petroleum Exporting Countries led by Saudi Arabia. This increase in oil demand from OPEC will drive up its crude prices. And guess who else is buying hundreds of millions of barrels of oil from OPEC?
You guessed it: the United States.
Why is there less Russian supply, anyway?
At first, the West, including the United States, exempted Russian oil and natural gas from the sanctions they imposed. The Biden administration backtracked on Tuesday, banning imports of Russian oil and other fuels into the United States, while the United Kingdom said it would phase out imports of Russian oil by the end of the year. (The EU is in a more difficult situation on this, since it is much more dependent on Russian oil.)
But the initial lack of formal bans didn’t really matter price-wise anyway. There has been a de facto ban on Russian oil since the start of the invasion, with most of the country’s supply remaining unsold.
This is because oil traders are incredibly nervous about touching these commodities. There’s a ton of uncertainty about buying Russian oil, whether it’s the ability to make deals given the sanctions on the Russian banking system, or finding tankers willing to go into Russian ports amid sea dangers in war zone.
As a result, the main type of oil that Russia exports to Europe is offered for sale at a deep discount because no one wants it. JPMorgan recently estimated that more than 4 million barrels per day of Russian oil has actually been shelved.
So investors are essentially pricing oil as if supply from Russia is not available at all. And again, less supply equals higher prices.
Why can’t other countries pump more?
Good old COVID has struck again. No one wanted oil in general in the spring of 2020, when global stay-at-home orders meant no one needed to fill up and drive to the office. As demand craterd, so did oil prices – even briefly trading at negative prices.
In turn, OPEC+ has cut production sharply to support prices. And they’ve kept production targets low since then, only gradually adding production back, even as demand for oil and gasoline rebounded earlier than expected.
Guess who is part of OPEC+? Russia. So yes, OPEC+ is not rushing to the rescue. The Saudis made it clear for months, even before the invasion, that the group did not plan to turn on the oil taps anytime soon.
This iron resolve may or may not crack, however. In a puzzling development this week, the UAE’s ambassador to Washington told CNN the country wants to increase oil production and would encourage its OPEC+ partners to do so. But later, the UAE’s energy and infrastructure minister tweeted that the country would stick to its OPEC+ deal and gradually ramp up production.
So what, Iraq’s Oil Ministry said its leaders met and agreed that its OPEC+ partners should balance supply and demand to stabilize the market. At this point, who knows.
Why can’t US oil companies increase production, then?
Russia was the world’s second largest oil producer in 2021, pumping 9.7 million barrels a day – but the United States is No. 1 with 10.2 million. US companies are failing to meet these nationally mandated, OPEC-style production targets. But U.S. oil producers can’t or won’t fill the supply gap, even though they could make money given high prices and demand.
Here again, COVID strikes. Like many industries during the pandemic, oil producers are struggling to find staff and procure specialized equipment. Meanwhile, US oil companies are still suffering the pain of this major oil crisis in 2020, which triggered a wave of bankruptcies. Since then, the stock performance of major oil companies has also lagged the market as a whole. And as fossil fuel makers, they worry that future environmental policies will hurt future oil demand.
All of the above highlights how oil and gas prices are tied to geopolitical events, the pandemic, drilling logistics and much more. And that’s on top of average US gas prices above $4.33 a gallon as of Friday.
In short, everything is a simple matter of supply and demand. But of course, it’s never really that simple.
Note: This story will be updated with a video.