Goodbye Urals and hello Houston? Joe Biden has announced that the US will halt imports of oil from Russia in retaliation for its increasingly bloody invasion of Ukraine.
The direct impact will be muted. The US is not a big buyer of Russian oil. But the embargo is a powerful signal, as a $9 jump in the price of Brent to $132 per barrel indicated. The US president hopes other democratic nations will follow suit — and that requires US oil companies, notably onshore frackers, to jack up production to cover resulting shortfalls.
It takes courage from a US president to countenance higher petrol prices for American voters. But the real political tussle is in Europe, recipient of 60 per cent of Russia’s oil exports according to the International Energy Agency. The UK promised to phase out Russian oil. Germany has so far declined to boycott Russian energy.
Wall Street shareholders are left in a sticky spot. They are already under fire from oil company bosses in Texas.
For several years, investors have required independent drillers to restrict exploration spending. Oil company chief executives previously scrambled for market share at all costs. Of late they have spouted previously unfamiliar terms such as “free cash flow”, “buybacks” and “dividends”.
CEOs are likely to interpret the Biden embargo as a green light to frack in the name of the free world. Shareholders who decline to loosen the purse strings risk opprobrium — and passing up on an opportunity to benefit from a potentially permanent shift in demand.
Two years ago, just prior to the pandemic, the US was producing 13mn barrels a day according to the US Department of Energy. The figure by the end of February 2022 was under 12m barrels daily. A wave of bankruptcies and shotgun mergers shook up the capital allocation priorities of shale drillers. Most have, remarkably, committed to put half or more of cash flow towards shareholder payouts.
The US exploration and production sector is not a cartel. Any company could choose to defect from de facto production ceilings in an echo of low-cost airlines raising capacity. Shareholder primacy has dictated that the demands of the investor class trumps all other considerations.
Pressure from the Biden administration can now be expected to reign in short term payouts, brake price rises at America’s petrol stations and reduce Vladimir Putin’s negotiating leverage.
This article was substantially rewritten then republished following President Biden’s announcement of a US embargo on Russian oil imports.