This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe
Tuesday, March 8, 2022
When an oil crunch turns foes into frenemies
Since Vladimir Putin attacked Ukraine for the sin of refusing to exist as a Russian satrapy, fiery crude prices are stoking fears of a 1970’s style oil shock, and sending a chill down the market’s spine.
The U.S. government is weighing slapping embargoes on Russia’s crude — the latest escalation in a series of dramatic penalties imposed on Moscow as its incursion into Ukraine enters its second week. The frenzy briefly drove Brent to a new 14-year high above $130 per barrel, sent the Dow swooning into official correction territory, and is stirring stagflation fears from their decades-long dormancy.
Although a solid labor market and healthy pay hikes have become a defining characteristic of the pandemic-era recovery, concerns are swirling about how much longer economic activity can remain impervious to soaring inflation that’s hit a 40–year peak, a point made by Yahoo Finance’s Ines Ferre on Monday.
Skyrocketing oil and gas prices — where the average price is set to climb to fresh records above $4 — are of no help, to say the least.
"You have to ask yourself: Is the consumer in better shape to deal with higher energy prices?" Baird managing director Michael Antonelli told Yahoo Finance Live.
"And I would say yes. But if you were to look into the history of the market... energy shocks can tend to lead to a recession," he added.
Enter three countries with rather rocky relationships with the West. With Russian oil potentially set to be taken offline, governments now need cooperation from all of them in order to blunt the impact of a potential black swan event (one that is indirectly benefiting Putin’s efforts as oil prices soar).
Over the weekend, Axios reported that the Biden administration is making overtures to Saudi Arabia —which itself has been something of an international pariah since the murder of journalist Jamal Khashoggi — in order to coax more oil out of the kingdom. And it doesn’t end there.
The White House is also reportedly reaching out to authoritarian Venezuela — an implacable foe since the reign of the now-deceased Hugo Chavez — in the hopes of adding more crude to the global energy queue, The Wall Street Journal reported late Sunday. Heavily sanctioned and isolated since Chavez’s demise, Venezuela may be ripe for the picking — or rather the peeling, with the White House reportedly hoping to “peel” Caracas away from Moscow’s influence, The Journal reported.
Perhaps the most surprising turn of events involves bringing Iran — an avowed foe of the United States — back in from out of the cold. Isolated for years because of its suspected nuclear ambitions, Tehran is becoming a linchpin for the Biden administration’s ambitions to offset the loss of Russian supply.
Alas, Iranian oil stocks won’t provide much more than “a temporary blip” of relief, according to Brenda Shaffer, a faculty member at the U.S. Naval Postgraduate School, a senior advisor for energy at the Foundation for Defense of Democracies, and a senior fellow at the Atlantic Council’s Global Energy Center.
“Energy traders have largely factored in the expectation of increased Iranian supplies. And there may not be as much Iranian oil ready to ship as the administration believes,” Shaffer wrote recently.
“It’s an open secret that a lot of Iranian oil is already traded. China already buys Iranian oil uninhibited. Iranian oil has many ways to circumvent U.S. sanctions — some is exported via Iraq and Kuwait, and there is a vast fleet of off-the-books oil tankers specializing in shipping Iranian crude and other liquid fuels,” she added.
Regardless of how much supply results from the moves toward Iran, Saudi Arabia and Venezuela, the events in Eastern Europe underscore how realpolitik has always been the fulcrum driving oil prices.
Europe is the most vulnerable in the near term, given its heavy reliance on Russian energy, and highlights the urgency behind the continent’s need to wean itself off those supplies. Our current crisis is also spurring a consensus among unlikely bedfellows — and not a moment too soon — that is rapidly coalescing around the idea that the U.S. should become a more reliable font of secure energy supplies.
Hate to say it, but we need to increase oil & gas output immediately.
Extraordinary times demand extraordinary measures.
— Elon Musk (@elonmusk) March 5, 2022
Sadly, it appears unlikely that the diplomatic efforts will make a material difference for a problem that economists say can only be resolved by curbing demand.