Ukraine invasion could keep energy prices high

CASPER —Wyoming’s oil and gas industry appears to be in for another tumultuous year. It looked, until recently, like the market would stabilize at last. Prices, though still high, would start to fall, and supply would eventually catch up with demand. Then the world learned that Russia was planning to invade Ukraine.

A number of countries rely on Russia, one of the world’s top exporters of both oil and natural gas, for fuel. If countries stop accepting that fuel, or Russia cuts them off, the cost of the remaining supply will go up.

“I think that the kind of two-part punch that we’ll see here is that we’ve got oil and natural gas impacted because of the dual nature of their production, but also the dual nature of Russia being a big player in both,” said Anne Alexander, an economics professor at the University of Wyoming.

Amid a wave of international sanctions on Russia this week, Germany announced that it would halt certification of a major Russian natural gas pipeline, Nord Stream 2.

The world’s other leading oil and gas exporters, including the U.S., are expected to divert a greater share of their production overseas if prices climb.

But doing so would drive prices up back home.

In the U.S., where oil and gas production has been slow to return to pre-pandemic levels, prices are already very high. Economists had expected production to recover from its early-pandemic collapse, stabilizing fuel prices, over the next couple of years. No one knows exactly how that might change.

“Normal market forces don’t necessarily apply,” said Gabriel Collins, a fellow at Rice University’s Baker Institute for Public Policy. “People kind of know what’s going to happen when the first punch is thrown. But after that it can escalate and expand in all kinds of ways that you didn’t necessarily foresee.”

Economists are pretty sure prices will stay inflated for longer, or even go up before they come down. That’s a silver lining for Wyoming’s bottom line — higher oil and gas prices would boost state revenue and keep coal competitive for longer — but could further hurt residents already burdened by the high costs of home heating and gasoline.

What happens next depends largely on two hard-to-predict actors: oil producers and Russia.

According to Rob Godby, an economics professor at the University of Wyoming, U.S. oil and gas prices are already rising. The question, he said, is how producers, who have been more cautious since COVID-19 lockdowns caused demand to crater, will respond.

“Previously, it was just growth at all costs,” Godby said. “Since COVID, oil companies have really focused on profitability.”

Some oil and gas producers, particularly large, private, well-resourced ones, could act quickly to capitalize on the higher price. It’s already happening, to some extent, in places like Oklahoma.

Wyoming, with its high share of harder-to-permit federal leases, usually attracts longer-term investments. And most companies are likely to wait until upping production feels less like a gamble.

When that happens, if it ever does, is up to Russia.

According to Collins, if Russia deescalates the situation or slowly advances into Ukraine, U.S. producers might choose to wait, even if prices continue to climb. But if the conflict accelerates and sanctions follow, companies may feel more confident increasing the fuel supply.

“It depends on what happens in the next few hours and days,” Alexander said. “I think people are probably going to wait and see.”