from Russia with love

Gregor:

The United States reached peak oil production in 1971, as forecasted by M. King Hubbert, the Shell geologist. Before that time the US attained a form of glory in its oil age with spectacular discoveries in Texas, a robust industry, strong exports to the rest of the world and lots of free wildcatting. The oil age in the US also gave rise to novels and films, like Upton Sinclair’s Oil and of course George Steven’s vehicle with James Dean, Giant.

Russia appears to have peaked now without enjoying any such glory. Perhaps the promise of Khodorkovsky’s Yukos, which charged out of the gate and looked to deliver on the dream of a modern, efficient corporation was doomed by the oligarchical terms of its founding. Large mega-projects like Sakhalin also succumbed to the vagaries of the State, and now the bloated Gazprom looks more like a portrait of decay than an instrument of power. It’s not just the volatility in the price of Oil and Gas that was the undoing of Russia. It was Russia’s historical propensity to eat itself.

2008 saw Russian oil exports fall by over 5.00% and the outlook is not pretty from here. The fall in oil prices not only hurt Russia economically. Current prices are simply way too low for great swaths of Russian production to carry on profitably. While GDP per capita is still much lower in Russia than in the OECD, Russia simply does not have the kind of dirt-cheap labor or materials advantage that it enjoyed just 10 years ago. Very few oil producers do. And as a general point, oil at 45.00 continues to set the stage for a supply collapse. Russia is vulnerable to a huge drop in production.

The old paradigm where oil producers both had the discretion to increase production as prices fell, and the ability to do so, is over. non-OPEC supply is on a severe downward path. Some are even calling for a global supply collapse. Randy Ollenberger, managing director of oil and gas research at BMO Capital Markets, said global oil supply could decline by as much as 20 million barrels a day over the next three years if the oil industry stops investing. That is grim.