Will Russian Oil Ever Recover? // US Coal: More Production, Less Generation // Ukraine Blocks Russian Gas

Will Russian Oil Ever Recover?

Russian oil production looks like it got dropped down an elevator shaft. Irina Slav reports, "In March, it shed half a million [barrels per day], which by the end of April reached a full 1 million bpd, according to BP’s CEO, Bernard Looney. And this may well grow to 2 million bpd this month." And, she points out, these barrels might never come back.

Here's the rundown on why:

• First, financial and maritime sanctions hurt the Russian oil industry at the opening of the Ukraine war. But now Europe is poised to explicitly embargo Russian oil. Production can only fall from there.

• No one seems poised to take the slack. OPEC says it's at capacity, the US will only see production rise by 800,000 bpd.

• Who else? "Brazil is expanding its oil production but its total stands at around 3 million bpd, which is what the EU was importing from Russia before the war in Ukraine began. That leaves the Central Asian producers, who are parties to the OPEC+ agreement and firmly within the Russian sphere of influence, too."

It seems Russian oil won't recover but no one else can replace it. So, we can look forward to stubborn inflationary pressure from the tight oil supply. Energy's the main ingredient in everything--so when it gets pricey, everything else gets pricey with it.

And this will roll down hardest on those with the least. And while I'm sure many people feel deep solidarity with the suffering people of Ukraine, how many had a say in this? Do European leaders understand what the downstream consequences of this will be? When people can't make rent they won't blame Putin.

Earlier this year, I had a fantastic chat with the scholar John Constable. We discussed the "fiction of the Industrial Revolution" and what people misunderstand about energy. He made a chilling point during our talk: unspooling energy production--whether barrels or kilowatts--takes a long, long time to recover once achieved. And in some cases, the loss is permanent.

Food for thought.

US Coal: More Production, Less Generation

The Energy Information Administration predicts that US coal will see greater production and less generation going into next year according to their most recent Short Term Energy Outlook.

"U.S. coal production in the forecast increases by 20 million short tons (MMst) (3%) in 2022 to 598 MMst and by 7 MMst (1%) in 2023," they write. "The forecast increase occurs despite our expectation that coal use in the power sector will decline."

The EIA predicts that while exports and inventory builds will play a part in the expected production uptick, "labor shortages, rail congestion, and challenges obtaining equipment are expected to limit production gains."

"We expect rising coal production will replenish electric power sector inventories in 2023 that were depleted during 2021," they write. But it's not so simple. Although natural gas prices have been markedly higher than compared to last year, the EIA does not anticipate any increase in electricity generation from coal plants.

"Along with the continued retirement of coal-fired generating capacity, the remaining coal fleet has been facing constraints in regard to fuel delivery and coal stocks," they explain. "We forecast coal will provide 21% of total U.S. generation 2022 and 20% in 2023, compared with a share of 23% last year."

Grids all over the country have their queues chocked with more renewables projects while coal (and nuclear plants) are set to retire. If natural gas prices are set to remain high, then we might see a future of high electricity prices and low reliability. In fact, that future might already be here.

Ukraine Blocks Russian Gas

Gas flowing from Russian through Ukraine will stop today due to disruption from occupying forces according to the Gas Transmission System Operator of Ukraine. "While the network manager said the fuel could still be rerouted to avoid disruptions, Russian gas giant Gazprom PJSC said the switch isn’t possible because of how its system works," Bloomberg reports.

“Ukraine doesn’t bear responsibility for gas transit via Russia-occupied territories and Gazprom was properly informed about that,” Ukrainian state-run energy company Naftogaz said.

The disagreement over whether or not the gas can be rerouted seems to be the crux of the matter. Ukraine says it can; Russia says it can't. However, the route through Sudzha, which Russia says is impossible to shift the flows, has seen a 12% increase in gas orders.

Europe must be biting its nails. Last year, Russia supplied 40% of its gas needs--about 30% of that came through Ukraine. Now, as Europe contemplates a Russian oil embargo, would be an especially inopportune time for gas supplies to tighten by surprise.

Conversation Starters

• A new study has set the cost of cutting off Russian gas to about 12% of German GDP.

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