Biden's Russian oil ban won't stop petrodollars from flowing into dark crude supplies

On Tuesday, President Biden banned new purchases of Russian energy,

The move sent WTI crude oil futures (CL=F) surging 4.3% to settle at $123.70 — the highest closing price since 2008. But even as more nations join the U.S. to participate in the blockade of Russia's largest export, so-called "dark supplies" of Russian oil and gas will still flow to the rest of the world in shadow markets, warns one veteran energy trader.

"[W]hat you're looking at is an oil market that goes into the dark shadows if it gets banned," Energy Word founder Dan Dicker told Yahoo Finance Live. "That has a significant effect on the Russian economy, but it doesn't really have a big effect on supplies."

Dicker added that banned supplies almost always find its way to a destination — albeit often at deeply discounted prices and via off-market energy transactions.

Global energy markets have been priced in U.S. dollars since the mid-1970s in what are called petrodollars — payments made in dollars from one country to another for oil and gas products.

"Petrodollars flow. Petrodollars always flow. I've been in this business 35 years, it doesn't matter what war breaks out, oil finds a home somewhere if there's a market for it," he said. "China has been buying dark supplies from Russia. We've seen Shell, in fact, buy a dark supply of [Russian cargoes denominated in euros] at a deep, deep, deep discount."

Despite believing that Russian oil will still leak out of Russia, Dicker said it's important to isolate Russia economically — hitting it where it hurts the most by making it difficult to get paid on its biggest export.

"Russian barrels will find a home, but that does not minimize the impact that banning Russian oil from the regular markets would have on the Russian economy. It would be enormous and really important," he said. "[I]f you really do want to get at the [biggest source] of Russian revenues, you could do no better than to hit on oil and gas. It's really what has powered the invasion."

Boosting oil production is a challenge

Meanwhile, the International Energy Association (IEA) is ready to release another 60 million barrels of oil from its member countries' reserves — in a coordinated action among the U.S. and other countries to ease the oil supply shock. However, this will account for only about 60% of a single day's global crude oil consumption.

The lead time to bring additional pumping capacity online is rather long for two reasons, explains Dicker. First, until recently, energy prices had been depressed for years — something fresh in the minds of oil explorers and producers.

"[W]e have to remember that oil was negative $35 a barrel in April of 2020 — not that long ago. So what you have is you have an American oil infrastructure that's been decimated by low prices for the past four years," he said. "[I]n terms of their ability, their capital position, to quickly ramp up supply — it's not there, and it hasn't been there for quite a while."

Secondarily, traditional oil production can take years to ramp up, only shale oil can come online quickly. "[E]ven [shale] requires six months for new wells to be driven and drilled and for supplies from them to be delivered," he added.

In the end, prices will find an equilibrium as volatility ebbs, and its prices that will ultimately dictate the long-term path of oil supply.

"[N]othing solves a surplus like low prices and nothing solves a shortage like high prices — but that takes time," said Dicker. "So I would not expect the American oil industry to immediately respond [by] producing at a breakneck speed. They can't."

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Jared Blikre is an anchor and reporter focused on the markets on Yahoo Finance Live. Follow him @SPYJared.

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