Western Sanctions Have Russia’s Oil Industry Backed Up. According to the Wall Street Journal (WSJ), oil is one of Russia’s primary sources of income. Still, as Western sanctions take effect, Russia has to slow down crude oil production to prevent running out of storage space.
Refineries throughout Russia have had to cut down on or halt production. With demand for Russian oil decreasing, storage space for unused crude has become a commodity. Wells, the pump from the world’s largest crude reserve, has been forced to slow its output.
As of now, the impact of selling less crude oil has not had an overwhelming effect. The Russian oil industry still generates a substantial amount of revenue. However, the International Energy Agency (IEA) has predicted that Russia will turn off about 3 million barrels a day in production by May. The impact would be significant, leading to Russia’s oil output falling to under 9 million barrels a day.
As Western sanctions hold firm, Russia looks to Asian countries to become new buyers of its oil. According to the WSJ, the IEA states that there are no clear signs that China is rushing to purchase barrels of Russian oil.
According to Reuters, The Organization of the Petroleum Exporting Countries “told the European Union on Monday that current and future sanctions on Russia could create one of the worst ever oil supply shocks. It would be impossible to replace those volumes.” Consequently, it could be nearly impossible for Europe to forgo using Russian oil entirely.
According to the IEA, a significant drop in oil exports will significantly impact the Russian economy, as oil and gas sales constitute 45% of its federal budget. Western sanctions could also throw the Russian economy into a steep recession.
According to the Institute of International Finance estimates, Russia will earn $12.1 billion in revenue from its exported oil in March.
In the week of April 8, 1.7 million barrels of oil a day were offline, according to Richard Joswick, head of oil analytics at S&P Global Commodity Insights. Russia is having difficulty navigating what to do with an overabundance of oil as buyers are in short supply.
Lukoil, Russia’s second-largest oil company, has written to Deputy Prime Minister Alexander Novak regarding the storage situation. Russian newspaper Kommersant stated that in the letter, the Lukoil CEO emphasized that oil storage was packed to the brim and asked to redirect fuel to power plants.
Russia is the world’s third-largest oil provider, behind Saudi Arabia and the United States. A drastic downturn in Russia’s oil industry could have a global impact as it is the world’s largest oil exporter, shipping 5 million barrels a day.
Russia is upping its output to Turkey and India to help quell storage issues and minimize refinery shutdowns.