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Why Russian oil sanctions rattle America's energy markets, even though US is the biggest producer

Business Insider US
An aerial view of Phillips 66 Company's Los Angeles Refinery in Carson, California. Bing Guan/Reuters
An aerial view of Phillips 66 Company's Los Angeles Refinery in Carson, California. Bing Guan/Reuters
  • The US only recently started producing more oil and gas than it uses, becoming "energy independent."
  • But oil and gas prices are still set by the global marketplace, where Russia is a major supplier.
  • While some oil-producing nations' governments intervene directly in production, the US does not.
  • For more stories go to www.BusinessInsider.co.za.

US oil producers have been ramping up production in a big way in recent years.

America now extracts more oil and gas than it consumes on an annual basis, enabling the country to become a net exporter of energy instead of one of the world's biggest importers, according to US government data.

The political and industry term for this balance is "energy independence," but as price volatility from the Russian invasion of Ukraine sends gas prices spiraling to record highs, it's clear that the reality is more complicated.

Although the US is now the world's largest producer of petroleum products, it's also the top consumer, and more than a third of that volume is transacted in the global energy marketplace, where Russia is the second-largest supplier.

In other words, even though the US now puts more oil and gas into the pot of global energy than it takes out, the total mixture is still affected by the other major contributors.

When sanctions on Russia cause the supply going into the pot to suddenly shrink, with no reduction in demand, then prices go up.

True energy independence would mean that the US has its own pot, separate from the rest of the world, which would protect the country from these fluctuations. One reason it doesn't is that the actual stuff the US exports is different from what it imports.

Even though "oil" commonly refers to crude oil, in the global energy context it also includes the many refined products that are made from crude, like gasoline, diesel, and jet fuel. For the past decade, the US has been a major refinery for the world, exporting more finished petroleum products than it imports.

The larger reason the US doesn't have actual energy independence is even simpler: the US government isn't directly involved in the energy business as other oil-producing states are.

Unlike Russia or Saudi Arabia, which have massive state-owned oil companies that can be directed to step up production or set prices, the US has opted to let private multinational firms like BP or Exxon decide for themselves what would be most profitable.

The US does maintain a national strategic petroleum reserve of over 575 million barrels, from which US President Biden recently released 30 million barrels. The US burns through about 18 million barrels per day.

As Robinson Meyer points out in The Atlantic, that arrangement means any additional supply extracted from US geological sources won't directly lower prices for US consumers. Instead, it will be sold to the highest bidder in the international market where it will make a marginal dent in global demand.

Even so, lobbyists for the US oil industry say that the global energy market would be worse off, and have more volatility, if it weren't for the steadying presence of "American energy leadership."

"It's no surprise Vladimir Putin uses energy as a weapon, but as in World War II and other crises, America has Europe's back," American Petroleum Institute CEO Mike Sommers wrote for Fortune.

On one hand, it does appear that the wild ride in the international oil market is slowing down, with prices down roughly 15% from their unnerving high last week of $128 — well below the $150 to $200 range some analysts predicted.

On the other hand, oil prices remain elevated, and a gallon of gas costs more than ever at a time when broader cost-of-living increases are gnawing away at Americans' wallets.

Energy independence is starting to look a lot more like energy interdependence.

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