Russia’s Oil Is in Long-Term Decline – The War Has Exacerbated the Problem: InvestMacro

by Carol NakhleAnd the University of Surrey

Immediately after the Russian invasion of Ukraine, world oil prices It jumped above $100 a barrel, reaching $130 for Brent crude on March 8. The prevailing fear was that large Russian supplies would be lost on the world market either through Western sanctions or a voluntary decision by Moscow in response to Western support for Ukraine. This was particularly worrying when the world was already struggling to secure enough additional oil to meet rapidly increasing demand as COVID restrictions began to ease.

The International Energy Agency (IEA), for example, expect it “As of April, three million barrels per day of Russian oil production can be stopped” – about a third of the total. She feared it would lead to “the biggest supply crisis in decades”.

World Oil Prices (US$)

Brent crude prices, the leading global benchmark for global oil.
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However, such forecasts turned out to be very pessimistic. After more than four months of war, Russian oil and gas production Approaching the same level as when the war began. So why is this, and what can we expect in the future?

Russia is the power of energy

Russia is “incredibly unimportant in the global economy except for oil and gas,” says Harvard economist and former Obama adviser Jason Furman once said. It is only the eleventh economy in general, despite being The third largest oil producer after the United States and Saudi Arabia and the second largest oil exporter after Saudi Arabia. It also sits on the world’s largest proven gas reserves, and is the second largest producer after the United States and the largest exporter.

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In particular, Russia is the largest supplier of energy to the European Union, Account for 27% of oil imports and 41% of gas. The second-placed Norway accounts for 7% and 16%, respectively.

These simple facts explain why Russia is so important to the oil and gas markets, and why it wasn’t easy for the EU to ban its imports once war broke out. Several other countries have imposed restrictions: became Canada The first country to ban imports of Russian crude oil, then The United States followed suitBanning all types of oil, liquefied natural gas and Russian coal from April.
UK announced It will phase out Russian oil imports by the end of the year. Many private buyers, mainly based in the West, have also stopped buying for fear of reputation damage and falling into the minefield of sanctions.

However, despite all these constraints, oil prices have fallen from their March highs (although the war has set a floor of $100 per barrel). This is partly due to depression Global Economic Outlook Due to massive inflation and rising interest rates, which is likely to reduce the demand for oil. But at the same time, the countries that rushed to ban Russian oil are not among their countries Biggest Consumersnamely China, Germany and the Netherlands.

Asian buyers also welcomed The “opportunity” to buy Russian crude oil at a discount: the main product, known as the Urals, was sold at a price less than Brent crude by one US dollar, but Gap Currently over $30.

The International Energy Agency duly lowered its forecast. in that April report It predicted that Russian oil supply in that month would decrease by 1.5 million barrels per day [million barrels per day]’, adding that about 3 million barrels per day will be out of the global market as of May. But in may reportThe agency estimated that Russian oil production fell by about 1 million barrels per day in April and that “losses could expand to about 3 million barrels per day during the second half of the year.” according to Russian sources said the country’s oil production rose 5% to 10.7 million bpd in June, compared to about 11 million bpd in January/February.

What’s Next

After months of negotiations, The European Union announced On June 3, a ban was imposed on the import of Russian crude oil and seaborne petroleum products – effective within six months for crude oil and eight months for petroleum. Both Germany and Poland They also committed to halting pipeline imports, so 90% of Russia’s oil exports to the EU, or 2.5 million barrels per day, would be lost.

Again, however, a large percentage will be picked up by other buyers. In May, for example, China’s oil imports from Russia reached a record high of 2 million barrels per day, and Russia outperformed Saudi Arabia as the largest supplier to China. India has also boosted its purchases of Russian oil since the start of the war. China and India are the two largest countries in the world net oil importersChina is The second largest consumer of oil After the United States.

In total, the US Energy Information Administration (EIA) assumes that About 80% of crude oil subject to the EU import ban will find alternative buyers, mainly in Asia. As long as sanctions are not imposed by all major oil importers, Russian oil will continue to find buyers.

This explains the great discrepancy in estimates of how much Russian oil will be lost on the world market, especially in the short term – from less than 0.25 MB/day by OPEC to me 3MB/day by Goldman Sachs.

However, in the long run, assuming the Western Province continued and even tightened, the loss would become more pronounced. Even before the war, the Russian government Special Expectations It expected the undermining of its oil and gas production through the depletion of reserves and the effects of technological and economic sanctions imposed by the West after the 2014 invasion of Crimea. Even the most optimistic scenario predicted a modest short-term increase in oil production and then stabilization from 2024 to 2035. In the most conservative scenario, it was expected that Oil production is declining.

Since the outbreak of the war, many Western oil companies, which usually bring capital and technology, They came out of Russia. In a country with complex reservoirs, aging fields, and a hostile climate, a lack of investment and access to technology will accelerate long-term decline.

The global market will eventually absorb such an outcome, as other supplies become available and demand responds to prices, but Russia will have to live with diminishing market share and diminishing influence on global oil markets. This will make it difficult for Moscow to finance future wars. It also means that the Russians will have to diversify their economy at a time when a large segment of the world no longer deals with them.Conversation

About the author:

Carol NakhleEnergy economist, University of Surrey

This article has been republished from Conversation Under a Creative Commons License. Read the original article.

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