Perhaps no industry is more affected by geopolitical factors than the oil business.
In a recent column for OilPrice.com, energy journalist Irina Slav outlined some hypothetical scenarios that could cause oil to hit $200 per barrel. She theorized that events like a significant escalation in Ukraine or a nuclear event could serve as such a catalyst, but she deemed these scenarios unlikely.
So what is the likely path forward? Despite the headlines suggesting otherwise, Slav is still bullish on the future of fossil fuels.
The war in Ukraine and subsequent sanctions against Russia sent shockwaves throughout the industry. “Climate change” concerns and the rise of electric vehicles have dominated recent oil narratives. Fears of the “petrodollar” being pushed aside for the Chinese yuan and OPEC’s recent cuts are also part of the conversation.
Yet, despite these narratives, Chevron and ExxonMobil recently posted a combined $18 billion in profits in the first quarter and are now weighing what to do with their excess cash, as previously reported by The Dallas Express.
“The world runs on oil. It’s simple as that. And whoever produces this oil and gas gets the respective profits. Think about shipping and freight transport. All of this runs on fossil fuels,” energy journalist Irina Slav told The Dallas Express.
She notes the hypocrisy of governments who, on the one end, are pushing to diversify away from oil while, on the other hand, are demanding more production.
“Even though governments in Europe and the U.S. are trying hard to force the oil industry into not being an oil industry. And at the same time, they’re pushing the same industry to produce more of those same commodities that these governments openly hate and blame for climate change and everything bad that is happening in the world,” Slav explained.
“It’s very confusing. On the one hand, the Biden administration has been trying to squeeze the industry and make it much harder for them to operate. There have been threats of windfall profit taxes. On the other hand, they have pushed for more production and more investment in production.”
The EU’s ban on Russian oil imports has been a notable change in the oil industry in the past year. Slav said that China has been one of the primary beneficiaries of Western sanctions against Russia, as sanctions have led to lower prices for Russian crude oils.
India has also been a beneficiary of these sanctions, with the subcontinent serving as a workaround third party to circumvent these sanctions.
Russia is now India’s largest supplier of crude oil. A recent story in The Hindu Times called India the “laundromat” of Russian oil, as it takes in Russian crude and then sells it to Europe, calling it “a major loophole that can undermine the impact of the sanctions on Russia.”
“Instead of getting fuels straight from Russia, now Russian crude is going to India, they process the fuels and sell them to Europe. That’s how the European Union avoids its own sanctions against Russia,” Slav said.
Recent reports of countries considering using the Chinese yuan for oil transactions instead of the petrodollar are generating fears that the dollar may be losing some of its international appeal.
“I think that’s actually the biggest way that sanctions backfired,” said Slav.
“Because with all these literal barrage of sanctions against Russia and the seizure of Russian assets abroad, that made other countries wonder when they are going to be next. If the U.S. can do that to Russia, it can do it to whoever it wants to.”
“China has been pretty open about its plans to make its currency more widely used internationally, so that was a great chance for China to offer its currency as a replacement.”
Slav said there had been talks for BRICS (Brazil, Russia, India, China, South Africa) countries to devise their own currency based on a basket of their national currencies, but she says this will take time to develop.
“Brazil recently made a deal with China to process some payments in yuan. They see the Chinese currency as a safer alternative to the dollar because if you trade in yuan, you can’t be sanctioned by the U.S.”
She noted the flood of reports calling the petrodollar dead and claiming the dollar will lose its reserve currency status soon, but she said it would be a prolonged process if it does occur.
“Most of the world still trades in dollars because it’s convenient and has been for decades. This is slowly changing with some diversification into yuan, and I don’t know how bad that would affect the dollar,” Slav said.
Even if the dollar does lose its global reserve currency status, it may not be all doom and gloom, she said.
“It has happened to other countries without a major earthquake-like phenomenon accompanying it.”
“The British pound used to be the global reserve currency; the French franc. Countries have lost their reserve currency status, and it has been relatively painless.”
Global oil consumption is expected to hit a record high of 102 million barrels per day in 2023, despite record investments in renewable energy sources. Slav said that renewables are doing “absolutely nothing to reduce oil demand.”
As nearly every major auto manufacturer rushes to shift their lineups to EVs, Slav notes that EVs are unlikely to diminish the oil demand.
“You drive EV sales higher by offering people money to buy them. But when you run out of money, and you will run out of money, what do you do?”