Western Sanctions Have Sidelined a Lot of Oil

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--Geopolitical sparring at least over the last decade or so has created significant blowback on the global economy as Western sanctions stifle some of the world's leading oil producers.

Contractual disputes between Russia and Ukraine during the early aughts left European gas consumers in the cold given the dense network of Soviet-era pipelines extending through Ukraine.

That spat culminated in a race to diversify the European energy sector, though the once-favored Nabucco natural gas pipeline from Iraq, Azerbaijan and others was not among the winners. Instead, the European Union doubled down to some extent with early support for Russia's South Stream and Nord Stream natural gas pipelines.

That, however, eventually did catch the attention of Western allies who worried about Russia's weaponization of its natural resources. Even still, some European supporters of Nord Stream in particular warned against playing geopolitical football on the European continent.

Starting with the response to the Russian annexation of the Crimean Peninsula of Ukraine in 2014, however, geopolitical football has been the name of the game in the regional energy sector.

Eight years later and Russian ambitions for Ukraine, a former Soviet republic, finally forced an about-face on geopolitical linkages. By year's end, members of the European Union will phase out waterborne deliveries of Russian crude oil. North America shunned most Russian petroleum products shortly after the war began in February.

By some estimates, the collective sanctions add up to a loss of as much as 2.2 million barrels per day (BBL/d) in Russian crude and refined petroleum products.

An early relief valve had surfaced in the form of a breakthrough in nuclear negotiations with Iran. According to the U.S. Energy Information Administration (EIA), Iran accounts for about 12% of the world's total oil reserves.

"Despite its abundant reserves, Iran's crude oil production has fallen since 2017 because the oil sector has been subject to underinvestment and international sanctions for several years," the EIA stated.

Former U.S. President Donald Trump unilaterally withdrew from the Joint Comprehensive Plan of Action by 2018, ending an agreement that saw Iran curb its nuclear ambitions in exchange for access to the global energy market.

If a new arrangement were reached and Iran secured relief from sanctions, the EIA estimates Iran's crude oil production could return to full capacity of 3.8 million BBL/d, but that's a big if.

In Libya, NATO forces intervened in the civil war that grew out of the so-called Arab Spring, a wave of democratic movements that swept briefly across the Middle East in 2011. More than a decade after the Western involvement, and Libya has only occasionally been able to reach its peak production capacity of around 1.7 million BBL/d because of lingering internal conflicts.

Meanwhile, the U.S. government offered concessions for Italian energy giant Eni (NYSE:E) (Rome) and Spanish major Repsol (Madrid) to trade in Venezuelan petroleum, but that came only after the myriad of supply-side challenges pushed the global economy to the brink of recession.

Western connections between geopolitical issues and fossil fuels date back at least to the early 20th century when Winston Churchill decided to power the British naval fleet on oil rather than coal. Since then, various political doctrines have tied national security to access to fossil fuels.

In a fit of irony, that national security and energy security now seems under threat. All told, there could be as much as 10 million BBL/d of oil that's sidelined from the market because of Western geopolitical decisions.

And that comes to the detriment of the global economy. Narrative strains of "pay any price, bear any burden" aside, compounding factors are adding up. The World Bank revised its annual growth forecast from 4.1% in January to 2.9%, saying that growth will be slowed for the rest of the decade.

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