Inadvertent Departure from Fossil Fuels Production

Just how disastrous Vladimir Putin’s decision to rely on the export of oil rather than to modernize and diversify the Russian economy is going to become ever more obvious in the coming years given that world prices of oil may fall to as low as ten US dollars a barrel and Russia’s production of oil to fall by almost 30 percent over the next 25 years.

Those predictions are offered by the new annual report of the International Energy Agency, and they point to a disaster for Russia even if oil prices might occasionally spike upward from where they are now unless Moscow takes step to end Russia’s dependence on oil exports.

The reason the IEA says oil prices will fall is rooted in lower production costs brought about by the fracking revolution. Demand in fact will grow by 12.5 percent by 2040 to 103.5 million barrels a day, “Nezavisimaya gazeta” journalist Olga Solovyeva says in reporting on the findings of the agency.

“For Russia,” she says, “the IAE predictions are hard to call optimistic. Russian oil production is slated to fall by 30 percent to 8.5 million barrels a day from its current rate of 10.9 million.” While Russia’s oil companies may do all right, the report continues, the Russian government is going to be constricted by a decline in revenue from the sale of oil abroad.

“West that are using fracking can adjust their production levels at lower losses than those like Russia that use this technology for a much smaller share of their production.”

The situation may become even more dire as the world enters a period of extreme volatility in oil prices because those countries in the West that are using fracking can adjust their production levels at lower losses than those like Russia that use this technology for a much smaller share of their production.

There are three other trends which are likely to hurt Russian income from the sale of oil in the short term, according to Azret Guliyev, an official of the Solid Company. First, “the price of oil today does not depend [in this first instance] on the real size of demand and supply. It is formed by the trade of production instruments.”

Second, he points out, “Trump’s election as president of the US almost certainly will lead to the strengthening of the dollar and to an increase in key rates. As a result, the price of a barrel of oil in dollars will be less than today.” Moreover, increased US production as a result of his policies and the fracking revolution will push prices down as well.

And third, there is likely to be a slowing of economic growth in China and hence in overall demand.  Thus, “the price of a barrel of oil will more likely fall than rise” and could even decline to less than ten US dollars a barrel, a fifth of what it is now.

Another Russian analyst, Georgy Vashchenko of the Freedom Finance Company, points to ab additional reason why Russia faces ever more problems in this sector: there are places in the US where the extraction of oil is profitable even at a price of 30 US dollars a barrel. There are far fewer such places in Russia.

Today, there is an even more compelling reason to think that time is not on the side of Putin’s Russia. American oil companies have announced the discovery of a massive new oil field in Texas. Not surprisingly, Russian officials have done their past to cast doubt on these reports.

 

 

Paul Goble – political scientist and diplomat. He is an analyst, writer and columnist with expertise on Russia.