If by "we" you mean the world, then yes Russia is ~13% of world production. 13% can be very impactful. For example, Russia produces particular grades of crude due to the characteristics of their reservoirs. Certain refineries are set up to efficiently turn that oil into useful products. If Russian oil goes away, we can't necessarily just turn the taps on high in the Permian to make it up. And if the countries that have those refineries that efficiently refine Russian crude sanction Russia, then the fact that someone else is theoretically willing to buy it doesn't mean they can use it.

There are legal ways around those sorts of problems like blending or refinery modifications, but they can take years and many millions of dollars, which companies generally aren't willing to spend until they are confident the situation won't change and render their investments worthless or even counterproductive. Iranian oil production cratered under sanctions.

Also important to remember that all this is on the margin - in a highly capital intensive, globally linked network, losing a couple percent of global production can have a dramatic impact on prices. This is because we may need 100 million barrels a day but only have an extra 1% of immediately available slack at each step in the system. In that case, losing 2% of some piece of the system, whether refining capacity or crude oil production, has to be compared to 1% rather than 100%. In that context it's a difficult thing to contend with. Crude oil demand is not as elastic as people tend to think.

Third, world oil demand is still increasing due to growing populations and improving standards of living in many of the largest population countries. This is often ignored as a factor and/or masked by temporarily reduced demand during COVID, but if demand is growing at 1% per year so we need another million barrels per day but instead lose a million barrels, we fall much farther behind.

In conjunction with that, consider that it is getting a lot harder to obtain capital for drilling and that US producers have become much more disciplined and unwilling to speculate/grow on debt. Additionally, NOCs and countries that depend on NOCs are now thinking about getting the best NPV for their remaining reserves and worked on getting their budgets within existing cash flow. Translation: everyone is happy to keep producing the same amount and watch the prices go way up. No one is eager to turn on the taps to fill a shortfall like they were in the past, when everyone was overlevered and overextended, and therefore had to produce as much as possible as fast as possible.

All of this is why I thought there was a better than 10% chance oil would run up over $180 a barrel sometime in 2022 - and that was before the Ukraine stuff happened. Now, I figured we needed some kind of geopolitical disturbance to get there, and Russia/Ukraine may be it.

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In conjunction with that, consider that it is getting a lot harder to obtain capital for drilling and that US producers have become much more disciplined and unwilling to speculate/grow on debt. Additionally, NOCs and countries that depend on NOCs are now thinking about getting the best NPV for their remaining reserves and worked on getting their budgets within existing cash flow. Translation: everyone is happy to keep producing the same amount and watch the prices go way up. No one is eager to turn on the taps to fill a shortfall like they were in the past, when everyone was overlevered and overextended, and therefore had to produce as much as possible as fast as possible.

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I don't think a five year old knows what NOCs and NPV mean.

double aught said:

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In conjunction with that, consider that it is getting a lot harder to obtain capital for drilling and that US producers have become much more disciplined and unwilling to speculate/grow on debt. Additionally, NOCs and countries that depend on NOCs are now thinking about getting the best NPV for their remaining reserves and worked on getting their budgets within existing cash flow. Translation: everyone is happy to keep producing the same amount and watch the prices go way up. No one is eager to turn on the taps to fill a shortfall like they were in the past, when everyone was overlevered and overextended, and therefore had to produce as much as possible as fast as possible.

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I don't think a five year old knows what NOCs and NPV mean.

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Oops. Rephrase: countries who make most of their money from oil want to make the most money over the next 20 to 50 years, not just today.

NOC = national oil company, a state-owned company that produces the oil and sends some of the revenue back to fund the government

NPV = a measure of the total cash received over a period of time, adjusting for the fact that most people would rather have a dollar today than a dollar a year from now

Oil prices drive gasoline prices. Oil has gone up to $115/barrel. There are 42 gallons in a barrel. So $115/42 = $2.70/gallon of the gas price just from the crude oil.

Then you have the add about $0.60/gallon for the refiner to turn the oil into gasoline. Already we're at $3.30/gallon. About $0.10/gallon to transport the gas to terminal and gas station. So that gets us to $3.40/gallon. Add in $0.40/gallon in state and federal taxes that's 3.80/gallon. And $0.10/Gallon for profit and gas prices should be about $3.90/gallon right now.

A gas station operator needs to manage his cash flow. A week ago he bought a ton of gas before taxes $3.00/gallon and selling it today for $3.50/gallon. He's not trying to rip us off, it's because he knows that this weeks gas inventory is going to cost him $3.40/gallon so he needs to have the cash to purchase.

Oil is traded on global market. The same speculation that made oil go negative is also driving up the cost. There is fear of near-term supply shortage. But if you look at the futures curve out into next year, prices are lower so near term fear supply disruption is driving up oil price which translate to higher gas price.

Wait….so Biden and Kamala aren't sitting around telling them to keep raising prices?!?! That's not what my crazy uncle said.

Russians are meanies and got put in time out

Saudis are greedy and want all the money

America is making less oil and gas

That makes gas cost more

Your mommy has to pay more for gas

$30,000 Millionaire said:

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Russians are meanies and got put in time out

Saudis are greedy and want all the money

America is making less oil and gas

That makes gas cost more

Your mommy has to pay more for gas

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IE we should pump more out of the ground here in the US

Yes

OPEC is producing the same amount of oil as they did in July. I don't think they're to blame for the recent run up.

https://www.nytimes.com/2022/03/02/business/oil-prices-opec.html

Bocephus said:

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Learning a lot so thanks for that. I said 13 percent meaning 13 percent of the oil that Americans use is imported from Russia. Not 13 percent of the world.

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I'm not sure what the exact numbers are, but I think Russian crude is less than 1% of what we use in the United States. We mostly use what is produced here, and then the largest sources of foreign crude are Canada, Mexico, South America, and Middle East.

Edit: but because of how the market is global, it has more than a 1% impact on our ability to get crude.

jagvocate said:

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Also, something about Continental USA oil supply isn't meeting base petro chemical demands. See the continuous draws from the nation's Strategic Petroleum Reserve. If demand goes up or world wide supply stumbles more, expect $165 WTIC.

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The SPR draws are generally PR for whatever administration is in charge, not meaningful contributions to the supply and demand balance. The best that could be said for it is that advertising the draws may convince a few people that they don't need to fill rubbermaids with gasoline just in case.

The SPR holds 700 million barrels and it can send out 4 million barrels per day. If we drained the SPR, we could make up 4% of world oil for less than six months, shorter than most sanctions last, and then we would not have a strategic reserve. You would also have to find a bunch of tankers to send it to where it's needed, which is no mean feat. Russia produces 12-13 million a day.

The SPR is meant for fueling our jets, ships, and tanks in a war situation, so you wouldn't want to draw it down in a meaningful way just to manipulate consumer pricing, ESPECIALLY when the cause is armed conflict involving a world power i.e. a warning sign that we're a lot more likely than usual to need it for it's true purpose.


I have a real problem with using the SPR the way presidents tend to.

Bocephus said:

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jagvocate said:

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Also, something about Continental USA oil supply isn't meeting base petro chemical demands. See the continuous draws from the nation's Strategic Petroleum Reserve. If demand goes up or world wide supply stumbles more, expect $165 WTIC.

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I thought that over $60 per barrel, it was profitable to drill in Texas. Why don't we simply drill more?

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1. Capital cost. It's much harder to get that money to drill new wells now than it was in 2010 or 2014. That is mitigated by the massive cash flows from wells at $90 oil and $4 gas

2. Drilling crew/service availability. The oil patch always has a hard time getting enough labor in boom times, and back to back crashes in recent memory along with whatever is going on with labor shortages generally have gutted the supply of labor.

3. Building materials. We have a global shortage of all kinds of physical goods, including steel, which is needed in large quantities for well casings, gathering lines, and all sorts of other stuff.

4. Infrastructure. More wells are useless without more pipelines to get it to market. It takes 1-3 billion to build a major pipeline plus years to acquire rights to the land and then build the thing. I don't think that's a huge deal right now in most basins because there was some overbuilding in the 2014-2019 timeframe, but it's a massive part of the general answer to that question. Trucks aren't a viable alternative in most situations. Trains can be, but not always and you still run into infrastructure and labor issues.

To piggy back on this thread, increase in fuel prices affect EVERYTHING! I was booking flights on Southwest yesterday and, in front of me eyes, rates from Houston to Charlotte nearly doubled.

Groceries already going up. All commodities will be affected.