Insecurity in the Black Sea Puts Upward Pressure on the Global Oil Market

The global oil price is edging toward $100 a barrel. If oil remains high, it will be difficult to bring inflation down. Most blame the Saudi Arabian and Russian oil cuts for the price increase and ignore other factors. However, maritime insecurity in the Black Sea is clearly a major factor putting upward pressure on the global oil price. In recent weeks, Ukraine has stepped up its attacks on Russian vessels in the Black Sea, including oil tankers, and Moscow’s threat to Kazakhstan’s oil exports from the Black Sea, remains in place. U.S. President Joe Biden will need to address the security situation in the Black Sea, if he is going to be able to lower the global oil price.

The need to improve shipping security in the Black Sea creates a policy dilemma for Washington, as it prefers not to constrain Ukraine. The Biden administration is signaling that it may return to its policy of releases from the Strategic Petroleum Reserve to address the rising oil price. However, further draining of the reserve creates a threat to U.S. energy security and Biden’s previous releases have put long-term upward pressure on the global oil price. 

Adding to the administration’s oil woes, is the emerging shortage of diesel in the American market. The diesel price has higher inflationary impact than gasoline price increases, since it is the work horse of industry, transportation of goods, and agriculture.

Stepped up Ukrainian attacks on Russian vessels in the Black Sea  and the fear that oil exports from the region could be disrupted have contributed to the current rise in  the global oil price.  With the return of Iranian oil to the market and the bleak economic news coming from China, the global oil price should have been moving downward. However, this didn’t happen, rather the opposite. In contrast to the media trend that have almost all pointed to the Saudi Arabian and Russian production cuts as the culprit, these cuts were anticipated and thus already reflected in the price. In addition, these cuts were motivated to offset the recent unleashing of Iranian oil to the market.  

Recently, Ukraine has stepped up attacks on Russia’s maritime vessels in the Black Sea, including  Russian oil tankers. Kiev has employed sea drones in many of the attacks. Through the maritime attacks, Kiev likely seeks to break the impasse on grain exports, offset lack of progress in its onshore counteroffensive, demonstrate that it can disrupt this important artery of global oil export, and thus spur U.S. and European action to break the status quo. Two million barrels a day of oil is exported from Russia’s Black Sea ports, in addition to export of  refined products. The lion’s share of this oil is from Kazakhstan. Ukraine has declared that it considers all Russian vessels as potentially carrying military equipment and thus potential targets.

As part of its war policy, Moscow aims to raise the global oil price. Russia also aims to coerce Kazakhstan to fall in line with its Ukraine policy. To further these aims, since the war began Moscow has periodically cut off Kazakhstan’s oil exports at Russia’s Black Sea ports. This took off over a million barrels a day of oil supply and led to global price spikes. Russia has found a perfect tool to jack up the world oil price, without it having to curtail export of its own barrels. The knowledge that Moscow could use that lever at any time, together with the potential for physical disruption of oil exports from the Black Sea due to the fighting there, has created a price premium.

The insecurity in the Black Sea is not likely to abate soon, rather likely to escalate. The Biden administration confronts a challenge: it does not want to restrain Ukraine, yet a higher oil price adds inflationary pressure,  and the administration wants to squash any factor that increases the oil price in an election year. The administration is signaling that it may release more volumes from the Strategic Petroleum Reserve, but this stop-gap effort, would leave the market even less secure, by lowering the  stored supplies if an actual disruption takes place and thus in the long-term contribute to a price increase.

The administration has not  commented openly on  the impact of Black Sea insecurity on the global oil price. However, the Biden administration will need to identify a plan to enable Ukraine to continue its struggle against Russia, while maintaining shipping security in the Black Sea. Elements of a plan could include helping Kazakhstan get oil to market via other routes than Russia’s Black Sea ports, such as across the Caspian and through Turkey to the Mediterranean.  Washington may consider requesting from Ukraine to refrain from attacking oil vessels. Not an easy task to improve the oil flow from the Black Sea, but if not accomplished, Washington will need to get used to $100 oil.

Prof. Brenda Shaffer is a faculty member at the U.S. Naval Postgraduate School. She is also a Senior Fellow at the Atlantic Council’s Global Energy Center and Senior Advisor for Energy at the Foundation for Defense of Democracies (FDD). FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.