Expanded Sanctions On Russian Oil Will Cause Economic Pain For Everyone

Consumer gasoline prices are already painfully high but drivers should expect things to get worse before they get better.

While U.S. benchmark oil prices have retreated to about $110 a barrel – after reaching $130 earlier this month – the slide is more likely than not just the calm before the storm.

The potential for gas prices to increase – above the current $4.24 a gallon average – looks strong as Europe considers joining the ban on Russian oil. Such an embargo would cut off more than 2.1 million barrels a day of supply originating from Russian pipelines and ports.

That would further squeeze already tight global markets for crude and refined fuels like gasoline and diesel ahead of the summer driving season and peak demand in the United States.

It’s not guaranteed that the European Union will agree to join an embargo on Russian oil like the United States, Canada, and Australia implemented. It’s a far bigger sacrifice for Europe, which relies on Russia for almost 30 percent of its oil. Such a move would also set off a scramble for replacement supplies that would upend global oil markets.

That could become a significant problem for the United States, which still relies on non-Russian imports to satisfy demand for gasoline and other refined products, particularly on the East Coast.

Thanks to the shale boom, America has become a net exporter of petroleum – that is, we ship out more crude and finished petroleum products than we take import. The reason for this is because U.S. refineries are set up to process heavy, sour crude, while the oil produced from U.S. shale regions is predominately the lighter variety.

Imports of heavy, sour crude to feed U.S. refineries – including Russian Urals grade – should not be discounted when it comes to estimating the ban’s impact on the economy. Our reliance on foreign oil remain significant and it’s here where further disruptions to Russian supplies could have economic consequences for consumers.

In 2021, the U.S. imported about 8.47 million barrels a day of petroleum from 73 countries. Crude oil accounted for 6.11 million barrels a day, or 72 percent of that total, while other petroleum products like gasoline accounted for the remainder.

While replacing Russian imports of around 300,000 barrels a day will be easy enough, the entire petroleum complex will become more expensive if Europe cuts off Russian supplies, meaning our import bill could skyrocket.

Some analysts think crude prices could push as high as $150 to $200 a barrel if the European Union goes along with the ban. Russian officials, meanwhile, are warning prices could hit $300 a barrel.

Those levels of high prices would likely result in significant demand destruction as many consumers would no longer be able to afford to drive as much they would like. Filling refineries with more expensive crude would likely decrease European refining runs, putting less fuel on the global market and adding to prices.

Unfortunately, there’s few options for relief, and such a development could sever a critical artery for U.S. consumers.

The United States typically imports a significant quantity of gasoline to the East Coast in the run up to the summer driving season. The East Coast market is short refining capacity and will be especially so this year given the recent shutdown of two regional facilities. The fuel-producing unit at PBF Energy’s Paulsboro, New Jersey plant was closed in late 2020. While the Come-by-Chance refinery in Eastern Canada switched to producing biofuels only last year.

Much of that gasoline flow into the U.S. comes from Europe. Europe’s refining sector was under pressure even before Russia invaded Ukraine, and broad sanctions could disrupt volumes of crude supplies to its downstream sector — volume that cannot easily be replaced.

Traders and shipbrokers have noted that current flows of gasoline to the U.S. market are already low and getting worse.

The environment for higher gasoline prices also exists in the domestic U.S. market.

The U.S. downstream refining sector is gradually emerging from annual maintenance shutdowns, with refinery utilization levels recently topping 90 percent nationwide. Inventory build-up is low, even as demand continues to return after pandemic lows.

Refiners expect U.S. utilization to face headwinds throughout the year. The downstream industry delayed several major turnaround projects in 2020 and 2021, primarily because of the pandemic, and these repairs and maintenance projects must be completed now.

Moreover, the United States and Canada have seen a dramatic downsizing of refinery capacity amid economic rationalization and the accelerating energy transition. Since mid-2019, North America has lost close to 1 million barrels a day in capacity, as refiners anticipate lower fuel demand in future years and convert more operations to producing low-carbon biofuels.

Global fuel markets may need more supply from the United States, especially if disruptions to Russian supply persists.

As painful as prices may be for U.S. drivers, they are often worse elsewhere. U.S. refiners will prioritize selling into markets where profit margins are highest, which means more competition for a shrinking supply of refined products. Such is the nature of capitalism.

What all this means is that while cutting off Russia’s oil exports may be the best economic leverage the West has over Moscow for its invasion of Ukraine, it will come at a hefty price for consumers everywhere.