The Arab oil embargo created a historic energy crisis, yet that might look like just a walk in the park compared to the Russian-Ukraine war energy crisis, says Phil Flynn of the PRICE Futures Group.
The Arab oil embargo was a landmark time in the global energy space that shook the economy to the rafters and created a transformative time in energy of more efficacy and a goal of energy independence. It led to the US shale revolution and sadly, energy complacency.
Not learning from history, we sold off our strategic reserves and thought low gas prices were our God-given right. In Europe, in the name of climate change, they closed their nuclear plants, became more dependent on unreliable wind and solar, and tried to make up for the difference by becoming dependent on Russia as its major supplier even though Russia has proven time and time again not to be a reliable supplier.
Europe is learning the lesson that America did in the 1970s that you cannot take energy security for granted, or a price will be paid. Sometimes that price is in money, and other times in blood. Europe is pledging to get off Russian energy dependence, but it might be too late. Russia is threatening to cut off Europe’s gas supply, a move that would cripple the European economy. Bloomberg News reported that Russia threatened to cut natural gas supplies to Europe via the Nord Stream One pipeline as part of its response to sanctions imposed over the invasion of Ukraine, a move that could heighten the turmoil in energy markets and drive consumer prices even higher.
Russia has the right to take actions that “mirror” the penalties imposed on the Russian economy, Deputy Prime Minister Alexander Novak—who’s also in charge of energy affairs—said in a televised speech late Monday. He said no decision to shut off Nord Stream One has yet been taken, and the pipeline is currently operating “at its full capacity.”
The EU is considering a preemptive bond sale to shore up its economy, but the stimulus will not keep the lights on or the factories running. Bloomberg said that the European Union is considering joint bond sales to help counter the fiscal fallout from Russia’s invasion of Ukraine. It is clear that the EU has to totally reconsider its participation in the Polaris Climate accords as the need for their society to survive is dependent on energy that can be produced, as opposed to betting its energy future on green energy sources that do not currently exist.
Russian oil and gas is now viewed as toxic and the calls to ban Russian oil and gas are growing even though Europe, in many cases, has no alternative but to pay the Russian Madman Putin. Shell got the message. They apologized for buying discounted prices of Russian crude and are outraged by the atrocities committed by Russia in Ukraine. The Wall Street Journal reported Shell is withdrawing from dealing in Russian oil and natural gas, saying it would immediately halt all spot purchases of crude from the country and will phase out its other trading and business dealings. The energy giant previously said it would pull out of several joint ventures in the country. On Tuesday, it said it would also shut its service stations and aviation fuels and lubricants operations in Russia, and it won’t renew any Russian term contracts. It said it would find alternative supplies of oil as soon as possible, though it cautioned it could take weeks to fully make up the difference, leading to reduced production at some refineries.
Of course, that is still bullish for price as easy replacements for Russian oil and gas is hard to find. That is why the Biden administration has been reluctant to ban Russian crude oil. The pressure though is growing on the Biden administration to do so.
The Biden administration is looking to Venezuela and to Iran to replace those oil supplies, hinting of lifting sanctions but still fails to embrace the US oil and gas industry. Instead of looking for the US oil and gas industry to raise production, they trot out tired talking points about oil leases and price gouging and other ridiculous things to try to deflect blame from an industry that they dislike. I thought it was funny that they were trying to take credit for US energy production being higher in Biden’s first year than it was in President Trump’s first year in office, so I guess they are trying to tell us that the Biden administration is all for increasing US oil production. The Drill Baby Drill administration!
China has no problem seeing this as an opportunity. Bloomberg News Reports that, “China is considering buying or increasing stakes in Russian energy and commodities companies, such as gas giant Gazprom PJSC and aluminum producer United Co. Rusal International PJSC, according to people familiar with the matter. Beijing is in talks with its state-owned firms, including China National Petroleum Corp., China Petrochemical Corp., Aluminum Corp. of China, and China Minmetals Corp., on any opportunities for potential investments in Russian companies or assets, the people said. Any deal would be to bolster China’s imports as it intensifies its focus on energy and food security—not as a show of support for Russia’s invasion in Ukraine—the people said.
OPEC is seeing this current crisis as an opportunity. OPEC Secretary-General Barkindo said that the current energy prices underscore the need for OPEC and non-OPEC producers to stay fully aligned.
Biden’s electric car obsession is not looking very good right now. The component prices of batteries are becoming more expensive than oil. Reuters reported that, “The London Metal Exchange (LME) halted nickel trading on Tuesday after prices doubled in just hours to a record $100,000 per ton, fueled by a race to cover short positions after Western sanctions threatened supply from major producer Russia." So the cost of electric batteries may cost more than a gasoline powered car. Not to mention the cost to charge it.
Crude Oil (CL=F) price will also get a look at supply tonight with the release of the API report. Will we see Russian oil imports stay at zero this week? Stay tuned and look for modest supply draws across the board.
Record-breaking gas prices today. AAA puts the retail national average for unleaded at $417.3. The sad part is that might look cheap come this summer. The biggest impediment to rising gasoline prices is a concern right now that it could drive the globe into a recession, and thereby lower demand.
Learn more about Phil Flynn by visiting Price Futures Group.
