Russia Cuts its Oil Production; Drivers May Not Notice

Global crude oil prices rose Friday after Russia said it will cut its monthly oil production by 5% beginning in March. Yet drivers might not see a difference at the gas pump anytime soon, if at all.

Russia said it would reduce its oil output by 500,000 barrels a day in response to sanctions from the European Union and Group of Seven. The price of Brent crude, the global benchmark, increased as much as 2.7% to $86.78 per barrel, extending a week-long rebound after declining 7% in the first five weeks of the year.

Drivers, however, are unlikely to see a repeat of last year's surge in gasoline costs, mostly because of the complex nature of the global fuel market.

Here are a few reasons why Russia's announcement may not impact gasoline prices much, particularly in the U.S. and Europe.

Sanctions on Russian Oil

By and large, Russian oil already has stopped flowing West because of price caps established by the U.S. and E.U. In addition, the E.U. banned seaborne imports of Russian crude in December and this week did the same for Russian fuel. The U.S. banned all Russian oil imports shortly after the country's invasion of Ukraine last year.

As a result, the price of Russian crude has dropped significantly, trading at a 30-35% discount to Brent crude.

Much of the country's crude now gets shipped to China and India, which consume about a fifth of the world's oil and related products, and Russia has said it will refuse to sell to countries adhering to sanctions or price caps.

Russia's Role in Global Production

Even as the world's third-largest largest crude oil producer, the country produces just one in every nine barrels of oil the world consumes every day, and its planned production cut equates to just one of every 200 barrels consumed daily.

Gas Prices Reflect Many Costs Aside From Oil

The retail price of gasoline comprises myriad costs—refining crude into gasoline, distributing gasoline from refineries to gas stations, marketing expenses, and taxes, among others. In the U.S., the price of crude accounts for just more than half of what consumers pay for a gallon of gas.

Location Matters

Gasoline prices reflect the proximity of retail pumps to pipelines and refineries. In the U.S., for instance, drivers usually find cheaper gas along the Gulf Coast, home to almost half the nation's petroleum refining capacity. For example, a gallon of gas currently costs $3.99 per gallon in Lake Placid, N.Y., compared with $2.94 per gallon in Houston.

So Do Regulations

Fuel-efficiency regulations increase gasoline prices in some areas. California drivers routinely pay 30-40% more than average U.S. prices, largely because of higher-octane fuel blend requirements, state taxes discouraging gasoline use, and stringent environmental regulations.

In Norway, which has strict emissions regulations, a liter of gasoline currently costs $2.18 ($8.25 per gallon), compared with $0.36 per liter ($1.36 per gallon) in Egypt, where fuel standards are lax.

Time Lag

Production changes take time to move through the global supply chain. OPEC+, led by Saudi Arabia and Russia, cut its daily production in November by 2 million barrels—four times the amount of Russia's reduction. At the time, analysts expected the move would boost U.S. gas prices by 15 to 30 cents per gallon this winter.

Instead, gas prices fell almost 19% between Nov. 1 and Christmas, to an average of $3.05 per gallon from $3.75. They since have rebounded to about $3.40 per gallon but remain considerably lower than expected.