Brent oil prices momentarily on Feb. 24 breached $100/bbl on fears that the Russian invasion of Ukraine could disrupt the supply of Russian crude to global markets.

But oil flows are likely to remain unscathed for now.

President Joe Biden said earlier this week that “defending democracy and liberty is never without cost,” acknowledging the escalation in tensions was fueling oil’s rally.

Yet U.S. officials have been adamant they will not put sanctions on Russian oil in a way that would inflict pain on American consumers at the pump while inflation surges.

“We were quite deliberate to make sure that the pain of our sanctions is targeted at the Russian economy, not ours,” a senior administration official said in a briefing earlier this week. “None of the measures are designed to disrupt the flow of energy to global markets,” the official added.

Of course, Russian President Vladimir Putin will have his say as well. Will he hold back oil supplies in retaliation for economic sanctions?


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Moscow has weight to throw around in the oil market

Russia is producing around 10 million bbl/d of crude, of which around 4.5 million bbl/d are exported, making it one of the world’s largest oil suppliers. Cutting off some or all of that supply in an already tight global crude market would send oil prices spiraling well above $100/bbl and wreak havoc on western economies.

That might make it a tempting front to open in an economic war. But the blowback for Putin would be substantial and hard to contain.
For one, the domestic politics of an oil supply cut-off would be trickier for Putin than for gas. The vast majority of gas exports are carried out by state-owned Gazprom, while oil is exported by a broader set of companies, many of which are privately owned. A sustained oil embargo could anger many of those private producers and force field shutdowns, potentially damaging long-term Russian supply.

Putin would also risk hurting his own economy unless the resulting price surge offsets the lower export volumes—a situation that could prove long-lasting if prices subsequently fell but Russia was unable to reclaim its market share.

The fallout abroad, meanwhile, would be far more difficult to contain than a cut to gas flows. Whereas Russia could inflict more targeted economic damage within Europe by restricting gas to the continent, cutting off oil flows would be felt at fuel pumps globally, hitting enemies and allies like China alike. Even Moscow’s OPEC+ partners would be angered by an uncontrolled price spike.

None of this is to say Putin can’t or won’t cut oil supplies to global markets. But in an energy war, oil would be the nuclear option.

What about gas?

Natural gas is a far easier weapon for Russia to deploy. While cutting off oil supplies would trigger a broader fallout, gas markets are far more localized.

Around 40% of Europe’s gas imports come from Russia. And Moscow could exert immediate pressure on the continent by shutting off the taps, with limited spillover into global markets.

Analysts at Rystad Energy reckon the risk of Moscow deciding to “reduce or stop” gas flows into Europe have only grown since Germany halted certification of the Nordstream 2 pipeline.

Benchmark European gas prices are already five times higher than this time last year—and have jumped €20 this week to almost €90/MWh as traders fret over the possibility of Russian retaliation to Western sanctions.

Should the Kremlin decide to play the gas card, Europe’s options are limited: African imports are on the decline and there is not much in the way of domestic supply to step up.

A new energy strategy is expected to be announced by Brussels next week, with a view to weaning the continent off Russian gas—but that will take years to implement.

For now, Europe has about a month of “cushion gas” in storage, according to the Council on Foreign Relations. Commercial suppliers have about another nine weeks worth of supply.

Imports of LNG would be the primary method of filling the gap. The U.S. has been coordinating efforts with countries including Japan and Qatar to supply more LNG shipments to Europe. But with markets tight, the continent will have to pay up for the privilege.

As analysts at ClearView Energy Partners in Washington note:

“When it comes to natural gas, LNG is the only realistic alternative available at large scale on a short timeframe. Replacing Russian pipeline gas with LNG imports on a continuing basis might be theoretically possible, but it could also prove prohibitively expensive.”


This article is an excerpt of Energy Source, a twice-weekly energy newsletter from the Financial Times.