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Your Questions Answered: Energy Markets and the Ukraine Crisis


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As the deepening crisis resulting from Russia’s invasion of Ukraine roils global energy markets, we asked Jackson Hockley, senior equity analyst covering oil and gas, to answer some of your questions.

What impact will cutting off Russian energy supplies from global markets have on U.S. energy independence?

While the United States is “energy independent” at the moment, that description needs a bit of a qualification. In terms of total energy we are, in theory, independent when coal, natural gas and crude oil are all put together – the U.S. exports some of each of these fuels.

We are not, however, independent of crude oil imports – and we have not been for many years. In May, 2022, the U.S. produced around 11.9 million barrels of crude oil per day, down from a recent peak of about 12.8 million barrels per day in 2019. We consume about 20 million barrels per day and we make up the shortfall with roughly 8.5 million barrels per day of imports. Of those, about half come from Canada and fluctuating volumes come from Saudi Arabia, Mexico, Russia and a number of smaller suppliers.

It is also important to keep refinery capability in mind. While U.S. production from the Lower 48 is expected to continue to grow, particularly from the Permian Basin in Texas and New Mexico for at least the next five years, those increasing volumes will go primarily into the export market.

Most U.S. refineries are designed to process the medium-heavy and sour grades of crude produced from traditional domestic sources, while virtually all of the production coming from the unconventional basins (shale) is light sweet crude – oil that is less dense and contains less sulfur when it comes out of the ground, making it easier to refine for uses such as gasoline. All of the light sweet crude that can be run through U.S. refineries is already being converted. The excess light sweet barrels being produced have really only one place to go – exports.

Domestic policy decisions have an understandably large impact on U.S. energy independence. We are seeing tighter regulations not only on leasing acreage and drilling wells but also on permitting for new pipeline projects – a number of which have been delayed or cancelled. The Biden administration has issued new restrictions on oil and natural gas activity in Alaska and offshore areas in the Lower 48. Our belief is that the administration is following through on campaign promises to encourage the addition and use of renewable fuels and discourage the use of domestic hydrocarbons.

How will higher prices for oil and natural gas impact efforts to reduce carbon dioxide emissions from burning fossil fuels?

This is a tough question to answer but here goes.

The energy transition is set to be achieved in 30 years with a substantial portion of the shift to renewable energy coming later in that period. Consequently, we believe it will be 10 years or more before oil and especially natural gas see a significant decline in demand, regardless of short-term price shocks such as we are seeing in the wake of Russia’s invasion of Ukraine. Global demand is expected to grow through at least 2030 according to most industry watchers and we agree. Natural gas has solid growth, probably well beyond 2030, and there has been talk of some European countries possibly categorizing natural gas as a “clean fuel” to meet their commitments to the United Nations’ 2050 net-zero targets.

Natural gas is primarily used for power generation and industrial applications with a small share for commercial and residential uses, such as heating and cooking. The closure of coal-fired and nuclear power plants has left a void in the European market that cleaner-burning natural gas fills quite nicely. Plus, natural gas can be used for base-load demand when wind and solar power are not available, as well as providing the companion fuel for when renewables cannot meet demand spikes.

Crude oil is primarily a transportation fuel and most countries are pushing electric vehicles (EVs), so it is easy to see why demand ultimately could begin to decline, depending on how soon and fast consumers shift from internal combustion engine vehicles to EVs. There have been hints and comments from some politicians that it would be good for oil prices and gasoline prices to move substantially higher because that would make higher-cost EVs (in theory) relatively more attractive.

How much does the European Union depend on Russian energy supplies?

The EU is highly dependent on Russia for energy. Europe as a whole (not just the EU), relies on Russia for about half of its natural gas imports, according to the BP Statistical Review of World Energy in June 2021. In crude oil, Europe consumes approximately 12.8 million barrels per day while producing only around 3.6 million barrels per day with Russia again being a primary source – a significant portion of Russia’s 7 million to 8 million barrels per day of export volume has historically gone to Europe. Finally, with many European countries shutting down coal mines, the remaining coal-fired power plants became more dependent on Russia’s coal supplies, which could also be at risk from sanctions while European leaders seek other sources of the fuel.

Germany, in particular, appeared to struggle with actions such as cutting off Russia’s access to SWIFT, the world’s main international payments network. In efforts to reduce its dependence on coal and nuclear power to meet environmental objectives, Germany boosted its reliance on natural gas. The country gets about 30% to 35% of its natural gas supplies from Russia and its options for alternatives have narrowed as production of natural gas from the North Sea and the Netherlands has been declining for years. The liquified natural gas (LNG) available on the global market is not enough to meet the growing needs of Asia as well as new demand from Europe. The U.S., the primary near-term supplier of growth in LNG exports, does not have enough new projects in construction to replace the natural gas that Western Europe has historically consumed from Russia. And new regulatory hurdles in the U.S. impede the development of natural gas infrastructure in some states and regions, potentially suppressing further supply increases.


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