The Russia/Ukraine Oil Crisis Explained

[Music] Oil, the black liquid that makes the world go round. In 2020, oil production ran an average of 93.9 million barrels per day. Over the course of a year, that's 34 billion barrels of oil, enough to fill a 50 meter Olympic swimming pool 2 million 180 thousand times. The US produced 20% of that supply, Saudi Arabia covered 12%, Russia 11%, Canada 6%, China 5%, and the list goes on.

But now, as you've heard, there's a problem. Russia, as the military conflict continues in Ukraine, a different war has now begun. It's an economic war between Russia and the UK, EU, and United States. It started with economic sanctions restricting Russia's participation in the global financial system. But as Vladimir Putin continues his invasion of Ukraine, the target has very quickly moved to the black commodity that is so close to Russia's heart.

To inflict further economic pain on Russia, the UK have announced they will phase out Russian oil by the end of the year, and the US have announced a full ban on Russian oil and gas. "Starting now, we are banning all imports of Russian oil and gas and energy. We will not be part of subsidizing Putin's war." And if these boycotts start happening en masse, it'll certainly wound Russia's economy and also their war effort.

As you can see, 30% of their total exports are crude petroleum and 16.3% is refined petroleum. And between 2011 and 2020, 43% of the Kremlin's budget came from the sale of oil and gas. So, if more countries follow in the lead of the UK and the US, Russia could potentially start to see the money from their exports drying up, which could hurt their economy and also their ability to finance a war effort.

But here's the problem, the EU is rather fond of Russia's oil export. Most of Russia's crude oil and refined petroleum goes to European countries, and it's the same story with their gas exports too. In fact, 25% of the EU's oil and 45% of their gas comes from, you guessed it, Russia. Putin isn't stupid; he knows this. He knows exactly which countries need Russian oil and gas.

And now that the UK and US have started floating the idea of banning Russian oil and gas, he's been very quick to retaliate, threatening that he could be the one to pull the plug on those Russian exports. "You know you want to ban our energy resources? Alright, well, we'll stop them entirely and see how you like it."

Just a few days ago, Russian Deputy Prime Minister Alexander Novak made that point very loud and clear. In a state TV address, he said, "It is absolutely clear that a rejection of Russian oil would lead to catastrophic consequences for the global market. The surge in prices could be unpredictable; it could be $300 per barrel, if not more."

But he also said, "We have every right to take a matching decision and impose an embargo on gas pumping through the Nord Stream One gas pipeline. So far, we are not taking such a decision," Novak said, "but European politicians with their statements and accusations against Russia push us towards that. If you want to reject energy supplies from Russia, go ahead; we are ready for it. We know where we could redirect the volumes to."

Hmm, that would be a big problem. And that's the reason why this news recently sent the price of WTI crude and Brent oil as high as $128 and $130 per barrel, respectively. Think about it like this: supply and demand. The world's demand for oil is now increasing again as travel picks up, but if Russian oil is taken out of the equation, then suddenly the supply takes an 11% hit. Obviously, that tips the scales more towards inflation of prices, and that's exactly the reason why petrol prices are rising so painfully high right now.

But weirdly, on Wednesday last week, the oil prices took a drastic turn in the other direction. WTI crude humbled more than 12%, registering its worst day since November 26th, and Brent crude oil, the international benchmark, fell a similar 13% for its biggest one-day drop since April 2020. Why? Well, for that we need to understand the global oil landscape.

There are so many oil-producing nations in the world that if they went hell-bent and tried to output as much oil as possible all the time, then the supply would simply swamp the demand, and this would crash the price of the commodity so hard that all of a sudden, the oil business just wouldn't be profitable for these nations.

So, what a lot of the big oil-producing nations have done is they have banded together to form an alliance and have agreed to cap the amount of oil that is produced each day. They could pump more, but they don't. By controlling the oil output together as an alliance, this means the supply of oil never outweighs the demand for too long, which keeps oil prices stable and keeps oil-producing nations very rich.

You would have heard of this alliance too, by the way; it's called OPEC. It's the Organization of Petroleum Exporting Countries. OPEC started back in 1960 with five members: Iraq, Iran, Kuwait, Venezuela, and the biggest producer of them all, Saudi Arabia. Today, the organization currently has 13 members and they've also now established a wider alliance called OPEC Plus.

But of note, the United States and European countries are not a part of OPEC Plus, but Russia is. Now this complicates things as the US, UK, and EU are trying to boycott Russian oil, but they need OPEC to help out and fill the hole in the market for them to be able to do it.

With that understanding, then the question is, okay, if Russian oil is taken out of the picture, is it possible that OPEC can and will increase the production elsewhere to make up for the deficit? The will remains to be seen, but if we ask, can they? Well, the answer seems to be yes.

According to Reichstag, OPEC Plus has about 4 million barrels per day's spare production capacity. Russia produces 10 million barrels per day, but only half of that is exported. So probably yes, OPEC could increase production and be able to cover a ban of Russian oil. But will they? Well, possibly.

The big news last Wednesday was that UAE, which is an OPEC member, came out and said, "We favor production increases and will be encouraging OPEC to consider higher production levels." That alone sent the price of oil down 13%.

Reuters also reported that Iraq said it could increase output if OPEC Plus asks. And you know, if Saudi Arabia and Iran were of a similar opinion, then those two nations also have spare production capacity. But long story short, some OPEC members, mainly the UAE, are starting to give an indication that they might be happy to increase production, even though Russia is a part of that OPEC Plus alliance.

This would help to stabilize the supply as demand continues to increase, and would thus lower the price of oil. But that still doesn't really answer the million-dollar question: will OPEC Plus actually increase their oil output substantially to cover the loss of Russia? Because despite OPEC Plus having about four million barrels per day of spare capacity, as the Wall Street Journal notes, "Opening their taps would be to take sides against Russia," which co-chairs OPEC Plus.

At its most recent meeting, in the week after President Vladimir Putin's invasion of Ukraine, OPEC Plus took just 13 minutes to decide they would stick to their current production plans. They didn't even discuss the war in what was reportedly their shortest meeting ever.

So even though they can, I wouldn't rest assured that OPEC will start increasing their oil production to cover a potential Russian gap in the market.

So with all that said, you know what next? And what should we be doing as investors? Well, hopefully, this video has helped you realize that right now, the oil business is extremely unpredictable. You know, maybe tomorrow Russia backs out of their invasion, or maybe they take the Ukrainian capital. Maybe tomorrow Russia decides to stop exporting, or maybe tomorrow the EU says it's too reliant on Russian oil and gas and it will not ban it.

Maybe OPEC decides to go against Russia; maybe it decides that Russia is, you know, a valuable member of their alliance. Who knows? I think that's the point: the situation is extremely unpredictable.

I've seen a lot of investors see the volatility in oil and think there's an investment opportunity here. We, as investors, have been trained to look for abnormal market events and take advantage of them. But it's also times like these where it can be good to remember Warren Buffett's "too hard pile."

Personally, when I look at the oil situation and the day-to-day news articles and the political moves and the price swings, to me, it reeks of unpredictability. There are just so many stakeholders in the situation, many of which could swing either way.

Add to that the additional layer of foreign policy and military conflict. For me, the situation just sounds way too hard. When I'm investing personally, I like making as close to certain bets as I possibly can.

Maybe the situation is different for you; maybe you work in this field, you have a deep understanding of OPEC's, you know, motivations. But I think for me, and I imagine the majority of like everyday investors out there, with easier opportunities elsewhere, I know I can pretty certainly put this on the "too hard" pile and just move on to something different.

I think it's worth remembering that even though this is a market event, you know, it's still okay to take a pass. That's totally fine.

Let me know your opinion down in the comment section below. I still value your opinion and love to hear what you have to say. What's OPEC gonna do? You know, will the EU look to phase out Russian oil and gas?

But apart from that, guys, that's it for me. I hope you enjoyed. Leave a like on the video if you did enjoy it. Subscribe if you found it useful. Profitable links down in the description. New Money Clips, New Money Patreon link down in the description. Thanks to the New Money patrons for help funding the channel.

But guys, that's it from me. I'll see you all in the next video.