Overall, I’ve been disappointed with the reporting on the US embargo against Russian oil. The AP reported that the US imports 8% of Russia’s crude oil exports. But then they and other outlets list a litany of other figures without any context for relative magnitudes. Let’s shine some more light on the crude oil data.*
First, the 8% figure is correct – or, at least it was correct as of December of 2021. The below figure charts the last 7 years of total Russian crude oil exports, US imports of Russian crude oil, and the proportion that US imports compose. That 8% figure is by no means representative of recent history. The average US proportion in 2015-2018 was 7.8%. But the US share as since risen in level and volatility. Since 2019, the US imports compose an average of 11.9% of all Russian crude oil exports.
As an exogenous shock, the import ban on Russian crude oil might have a substantial impact on Russian exports. However, many of the world’s oil importers were already refusing Russian crude. The US ban may not have a large independent effect on Russian sales and may be a case of congress endorsing a policy that’s already in place voluntarily.
What about the effect on the US? We know that trade is mutually beneficial. So, we can’t hurt Russia with a ban without also hurting ourselves. It’s true that supply chains can adjust such that the US doesn’t pay an appreciably higher price. But if that’s the case, then there is little reason for us to think that Russia can’t adjust similarly. Indeed, sanctions only work if supply and demand are somewhat inelastic.
The figure below graphs the last 7 years of total US crude oil imports, US imports of Russian crude oil, and the proportion that the imported Russian crude composes. First, US total crude imports have had a negative trend at least since late 2018. As a result, US imports of Russian oil have become a larger share of our total imports. In 2015-2018, Russian oil composed 5% of all US imported oil on average. Since 2019, that share has risen to 9%.
The problem, however, is that the US is also a producer and an exporter. Yes, Russian oil accounts for some our imports. But, what does that mean for our net imports? From 2016 to mid-2020, our net imports had steadily fallen. We’d been getting closer and closer to becoming a net exporter of crude oil. However, halfway through 2020, that trend reversed. In the past year and a half, we’ve become increasingly reliant on all crude oil imports – including those from Russia. The implication is that, in absolute terms, the ban on Russian imports will hurt the US more now than it would have hurt two years ago.
We have already experienced greater crude oil and gasoline prices during this present Russian war with Ukraine. But, as the figure below reflects, we were already experiencing higher oil prices well prior to the recent conflict. What was driving higher prices prior to the war? I’ve read from multiple news outlets that prices are rising due to the rebounding demand after the Covid-19 recession. But that explanation is incomplete. Oil prices are higher today than they have been in seven years. But US suppliers have not responded by increasing production. That’s relevant because the US is the largest oil producer in the world and it’s true that we haven’t reached the pre-recession production levels. As of December 2021, crude oil output was still down 10.8% from the peak. But the US hasn’t produced the current low volumes of oil since October of 2018 – three and a half years ago.
US crude output was falling prior to the war in Ukraine and prior to Covid-19. Our current bout of higher gasoline prices has been at least three years in the making. If anything, lower demand during the pandemic helped to hide some of the upward pressure that slowing production was placing on prices at the pump.
The world, especially Europe, has made large strides in our transition to wind and solar energy alternatives. But the last months have shown us that we are nowhere near ready to make the transition fully. Germany will continue to bankroll Russia so long as it’s cold in norther Europe and as long as Germany continues to close nuclear powered electric plants. In the US, families are going to feel the pinch of higher gasoline prices and, in many ways, a falling standard of living. We might even begin to risk a supply-side recession if prices rise and people adjust their oil consumption enough.
I’ll end by saying that Elon Musk has it right. If we want to help the Ukrainian government, their citizens, and our own citizens, then we need to increase crude oil production. This may mean opening up access to proven reserves and fast tracking regulatory approval. But most importantly, suppliers will invest little in additional oil production so long as they view the US government as practically and rhetorically antagonistic toward the industry.
*Data on Russian exports is monthly averages of annual figures prior to 2021. Below area all of my sources:
- US Crude Oil Imports from Russia:
- Russian Crude Oil Exports:
- US Crude Oil Imports, Total:
- US Crude Oil Exports, Total:
- OK Price:
- US Crude Oil Production:
Reblogged this on Utopia, you are standing in it!.
Knowing the oil industry as I do, I agree with ” suppliers will invest little in additional oil production so long as they view the US government as practically and rhetorically antagonistic toward the industry.” Reading in between the lines, I think industry is waiting for this administration to formally request an increase in domestic production, but the administration cannot bring themselves to do that.
Also, the US oil industry nearly killed itself by producing the to max ~2016-2020, with the result that many smaller firms went bankrupt when they all drove prices down. Shareholders spent all 2020-2021 screaming at management to show “discipline” in capital spending. So they did, which is why production is low, and not growing much.
We’ll see, some smaller firms will likely not be able to resist the lure of high prices, and will start poking holes in the ground…